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Merchant Cash Advances: Strategic funding or financial scam?

On Behalf of | Mar 26, 2024 | Merchant Cash Advances

Merchant Cash Advances (MCAs) offer businesses a quick, albeit expensive, infusion of capital. Unlike traditional loans, MCAs provide funds in exchange for a portion of future sales. But are they a lifeline for businesses in need or a trap that leads to financial ruin? The reality is that the answer depends on the circumstances.

When does an MCA make sense?

An MCA can make sense for your business’ when you need quick access to capital and traditional loans are not an option. In these situations, MCAS can offer flexibility for businesses.

When is an MCA more hazardous than its worth?

One issue with MCAs are the exorbitantly high cost. Instead of a traditional interest rate, these are set up using a factor rate that results in daily or weekly payments and additional fees. It is important to get a firm grasp of the true cost of the MCA before signing off on the deal.

There are many online calculators that can help you get a better understanding of the cost, but not that these may not provide a true reflect of the MCA agreement you are considering. The agreement is subject to the provisions within the contract. It is generally wise to have legal counsel review the agreement to make sure you fully understand what you are getting into.

Important note: Some MCA lenders are subject of recent legal crackdowns

New York does not take predatory lending lightly. New York Attorney General Letitia James recently moved forward with a lawsuit against Yellowstone Capital, now Delta Bridge Funding or Cloudfund, stating its practices exemplify the serious legal consequences of predatory MCA practices. Yellowstone faces allegations of deceiving merchants with the promise of flexible repayments tied to sales, only to impose fixed, short-term repayments with rates soaring up to 820%.

The case of City Bakery illustrates how bad MCA terms have the potential for financial devastation. After 29 years, the New York establishment shuttered due to unsustainable debt incurred from an MCA.

In response to Yellowstone’s practices, the lawsuit seeks over a billion dollars in recompense, civil fines, and industry bans for involved parties. These measures underscore the gravity of fraudulent MCA activities and the legal system’s commitment to protecting businesses.

Merchant Cash Advances can be a double-edged sword. While they may provide necessary capital, the risks are significant. Business owners must weigh the potential for rapid funding against the likelihood of exorbitant costs and legal issues. The case against Yellowstone Capital serves as a cautionary tale: not all quick capital is good capital, and due diligence is paramount.