In this edition of The Small Business Show, Jim Fitzpatrick sits down with Ben Nicholson, President of Fortis Business Advisors, to delve into the ins and outs of Merchant Cash Advances (MCAs). These quick loans have become a popular option for small business owners needing fast cash, but Ben highlights the risks involved, from high interest rates to aggressive repayment structures.
During today’s discussion, Nicholson explains the growing prevalence and risks of MCAs in the small business sector. He notes how MCAs provide quick cash to businesses in exchange for a percentage of future receivables, often in the form of credit card transactions. Though appealing due to their speed and ease of application—funds can be received within 24 to 48 hours—Nicholson warns that they come with significant drawbacks.
For example, Nicholson demonstrates how a business receiving $100,000 through an MCA with a factor rate of 1.28 could end up repaying $128,000. When broken down, the interest on this loan can total an annualized rate of 54%, which can increase to as much as 82% if the factor rate is higher. The repayment structure is typically aggressive, with daily deductions from the business’s revenue, which can be especially difficult for companies with fluctuating cash flow.
Nicholson also cautions that while MCAs may seem like a quick fix for businesses in urgent need of cash—such as to cover payroll or rent—business owners must run careful cash flow projections to avoid overextending themselves. In cases where repayments become unmanageable, MCAs can resort to aggressive collection tactics, including legal action and adding fees and costs to the debt.
Nevertheless, Nicholson advises small business owners to consider alternative lending options, such as accounts receivable (AR) lenders, inventory lenders, or programs from the Small Business Administration (SBA). These options, while harder to secure than an MCA, offer more reasonable terms and less risk.
“When you’ve got 82% interest, you’ve got a lot of wiggle room to push that thing down and still cross your own break-even point, even if you have bad loans in there.” – Ben Nickolson.
