Running a small business is challenging under the best of circumstances, and the COVID-19 pandemic certainly hit small enterprises particularly hard. Near the top of the list for entrepreneurs is the need for capital and especially business loans during times of stress or expansion. In recent years, a plethora of new non-bank loan products has entered the marketplace to address the cash requirements of these businesses.
However, one class of often predatory products known as merchant cash advances or MCAs has emerged as evidence that the cure can sometimes be worse than the disease.
MCAs are short-term business lending arrangements generally targeted at small businesses with little history or with poor credit who are unable to secure traditional bank loans or sub-prime lines of credit. Due to their eye-popping cost and frequently suffocating repayment terms, these products are often the last of the last resorts and can hasten the demise of an already wounded enterprise.
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Let’s start with the basics. By law, merchant cash advances are not considered “loans” and are therefore generally not regulated by federal lending laws. They are structured as purchase agreements, wherein the lender agrees to buy a portion of a merchant’s future receipts. This is similar to traditional accounts receivable “factoring” agreements used by retailers for decades. But here ends the similarity.