MCA (Merchant Cash Advance) loans are marketed as a fast way to access cash. Online Lenders such as On Deck, Kabbage and others are pitching themselves as Small Business Lenders offering teaser rates as low as 9.99%. These so-called lenders are pushing something that can sometimes help entrepreneurs get out of a tough spot. However, more often than not, these lenders are pedaling death. With expedited application and funding processes, Online Lenders can be attractive to business owners, however, consumer advocates and government officials say that too often, these are simply predatory lenders at their finest.
Here’s how they evolved: Historically offered by credit card processing companies, a merchant cash advance was a lump sum of cash taken out as an advance on a borrower’s future sales. Typically, the borrower would then pay back the balance, plus a hefty premium, through automatic deductions of their daily credit card or debit card sales, or from the business’ bank account. These types of loans were typically used by retailers such as restaurants to other consumer businesses that had daily receipts collected via credit cards.
Today, with the advance in ACH (Automated Clearing House) technology, these loans are being pedaled by hundreds of companies across the country, mostly in New York (no surprise there) and California. Now a small business’ can apply by simply submitting bank statements, sign an egregious financing agreement (often with a pre-defined default judgement built in) and get cash deposited into their bank account quickly. Daily reverse ACH deductions are then taken out of the borrower’s account until the loan is satisfied. This can be debilitating toward cash flow to the point where many business owners are brought to their knees.
Here is an example of how this might play out: A lender approves a business (borrower) and gives an advance of $24,000 to the business, charging more than $1,100 in fees for things like issuing the advance, risk assessment and processing. To collect its payments, the lender deducts $499 a day from the business’ sales for 76 days. In total, the business paid more than $37,500, paying an effective interest rate of about 346%. This case was reported by Spencer Cowan, an executive research consultant for Woodstock Institute. Cowan testified about this before a Senate banking committee in January of 2016.
These automatic ACH deductions will continue as long as there is money for the Online Lender to withdraw. Many business owners take out new advances in order to pay off outstanding balances on previous advances, plunging them further into a cycle of debt that is all but impossible to satisfy. Many of these borrowers go out of business.
Many companies in the traditional factoring space are trying to help get these borrowers out of trouble by paying off the online lender and terming out the debt over a longer period of time with a more traditional monthly payment arrangement. In many cases this can be accomplished, but all too often the numbers simply do not work as the borrower has stacked multiple Online Loans on top of each other to the point where the business is simply too far in debt to survive.
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Mr. Cox is Managing Principal with Pendleton Capital Group, Inc. – a factoring and trade financing company headquartered in Houston, TX. PCG provides professional “best practices” Factoring and Trade Financing and other small business services. His office is in Houston, TX, and he can be reached for additional information or consultation at adam@pendletoncapitalgroup.com or 713-808-9746. The company’s website can be accessed at www.pendletoncapitalgroup.com
