Don't Use Merchant Cash Advance (MCA), Refinance Your Equipment Instead

Posted May 30, 2023

Cash flow ebbs and flows even in strong economic times. But right now, given the general state of the economy, with rising interest rates, market volatility, and general business slowdowns - cash flow is a struggle for many companies.

Small and medium-sized businesses can find it difficult to get a bank loan during economic downturns and especially when cash flow is disrupted. Unfortunately, many businesses are turning to an easy-to-obtain, but very expensive, and disruptive option, the Merchant Cash Advance (MCA). An MCA is typically a one-time funding that works like a loan but is disguised as a purchase of receivables. The MCA provider advances cash and then will make periodic withdrawals directly from your bank account using a control agreement to make the withdrawals. These payments can be taken daily weekly or at other agreed intervals. While each MCA Agreement may be different there are some key terms to understand:

  • Advance amount

The advance amount is the lump sum you receive when MCA is funded.

  • Payback amount

The payback amount is the amount that the business owner must repay. It is calculated based on the amount funded plus a myriad of fees including a charge referred to as a “factor.”

  • Holdback

The holdback is an agreed-upon percentage of the daily receipts which are withheld to pay back the MCA.

 Why Can Merchant Cash Advances Be Bad for Your Business?

1. High Costs

The repayment structure of MCAs typically involves fees including a fixed percentage (factor rate) of your daily or weekly receipts. Factor rates usually range from 1.1 to 1.5. Repayment terms are shorter than a traditional business or equipment loan, typically ranging from 90 days to a year. These charges result in very high costs which are not easily calculated. For example, an MCA with a 1.2-factor rate and a six-month repayment term results in a 40% APR* (and that’s before other fees are included).

*Source: Reconcile My MCA

2. Payback Cycle

Because the MCA payments are automatically deducted on a daily or weekly basis (either from your credit card transactions or from a bank account), your ability to repay the advance and associated costs depends on cash flow. As a result, you may not be able to keep up with the charges which are constantly accruing. Further you may find yourself without enough funds to service the MCA debt and meet ongoing expenses. If your business is doing well and has robust receivables, you’ll repay the advance as planned. However, if your receivables lag you will not be able to repay the advance as quickly, compounding your funding costs. It can be very difficult to actually get to a point where you have paid off the MCA. This creates a problematic cycle, often resulting in companies taking on additional MCAs. This is considerably challenging if the advance was a large percentage (sometimes more than 100%) of your receipts.

3. MCAs Can Scare Other Lenders Away

Because MCAs are so high cost and the repayment cycle is so difficult to break, most traditional lenders will not finance a business that is already using MCAs, because a portion of the sales revenue is already committed to repaying the MCA, Most other lenders will not provide credit and will take the impairment of receivables into account when evaluating a request for credit and would require the MCA be paid off before they would consider advancing any funds.

Additionally, if a company already has some traditional business loans, the addition of an MCA could violate the borrowing covenants of the existing loan, which could have additional penalties including the lender demanding full payment of their existing loan.

4. Lack of Regulatory Oversight

Because an MCA is actually not a loan (it's the purchase of a portion of your future receivables), the laws that govern traditional lending don't apply. For this reason, there are no state usury laws limiting how much MCA companies can charge. Therefore, terms and conditions vary widely among providers, making it difficult to compare MCA financing costs to the costs of a typical loan. Additionally, terms and conditions are often not fully disclosed during the application process, so often companies don’t realize the extent of the charges until it’s too late.

Source: Business Debt Law Group

Alternative to MCA - Use Your Revenue-Generating Equipment to Get Working Capital

If your business is equipment intensive, especially if you use that equipment to generate revenue, your machines have value and can often be refinanced to obtain working capital.

Compared with MCAs, a working capital loan based on the refinancing of equipment is a much less expensive alternative, and most likely a better and simpler alternative.

Benefits of Equipment Refinance for Working Capital Needs

1. Predictable Payments and Clearly Defined Loan Terms

Like any equipment loan or basic business loan, interest rate and term length will vary based on credit history and the type of equipment being financed. However, these terms are clearly stated and typically have fixed payment amounts for the life of the loan, which makes budgeting and cash flow easy.

And because the loan terms are typically longer, and fees and interest much lower than an MCA, payments are spread over a longer period of time, making them lower and more manageable.

2. Leverage Existing Equity

The equipment equity which you can borrow against, is its current market value less anything owed on that equipment. In most cases, this differs from the value shown on a balance sheet (because the balance sheet takes accumulated depreciation into consideration) and the actual value is higher than shown on the books. This can provide you with considerable borrowing power, especially if you have multiple pieces of equipment that can be refinanced.

Choose a Lender that is a Partner

A knowledgeable, reputable lender takes an interest in your business and will have knowledge and experience with your industry and the equipment that you own. The right partner will get to know you, develop a relationship, and want your business to succeed and grow. In the case of Commercial Credit Group, our team members will consult with you to help you explore your financing and working capital options to ensure your loan fits your business needs.

If you are exploring financing options and the potential lender doesn’t take the time to get to know you and your business, they don’t deserve your business. If the approvals are too quick and they don’t ask for any financial information (other than your bank account number), run as fast as you can – to your local banking partner or your equipment lender. They can help you brainstorm better ways to obtain the working capital you need.


If you are considering taking on a Merchant Cash Advance, we strongly urge you to seek additional financial input and explore other options. Contact CCG to discuss your options.


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Julie Murphy
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