You’ve heard the saying, “If it sounds too good to be true, it probably is.” That’s an understatement when it comes to lending sources. The reason is the risk involved. If something is too easy, too accessible, or too good to be true, it’s probably because you don’t know all the details that would discourage you from moving forward.

Often, choosing this option seems like the only fast and easy solution without considering other viable resources. But there is no upside to giving away your potential profit.

If you research through Google “Merchant Cash Advance options for small businesses,” you see most using catch-phrases like:

• Fast, easy, hassle-free funding
• When banks say no, we say yes
• Short-term payback process
• Overnight funding

These results might sound like the only answer to your problems when you’re in a bind. Trust us, we have helped many business owners who felt an MCA was their only option. Rapid growth is a risk for many lenders. A GovCon’s collateral for lending purposes can fluctuate, be inconsistent, and deter a traditional lender from the potential borrower.

Accounts receivables are usually looked at in terms of collateral in traditional lending options. The ebb and flow of contracts can sometimes seem inconsistent about AR, which stymies newer and growing businesses from accessing what they need from their current banking relationships.

Another issue with MCAs is loose language and the need for more transparency in their agreements. These lenders are not federally regulated like your bank is, so the way they word things in their agreement is set up to legally benefit them, not the borrower, and to ensure they get paid.

While your bank will just say no if they feel the risk of not getting paid is too high, an MCA may double down (literally) on the terms with a business that may potentially default. In nine states, confession of Judgement is legal, meaning there was a clause within the agreement allowing the creditor to obtain judgment against a debtor on the occasion of nonpayment, even without advanced notice to the debtor.

It’s practices like these that have tarnished the lending community. In 2023, the FTC filed multiple lawsuits against MCA companies that had preyed upon the lack of understanding of the terms of agreements used with their clients. Furthermore, they were prosecuted for unfair collection practices that even included threats of physical violence. Though this may not be the practice of all MCA lenders, it is prevalent enough to cause concern.

We always advise our network to over-educate themselves before taking action and have the ability to utilize legal counsel to go over terms that you may miss or not fully understand. It’s a trust-but-verify course of action that could save you from unknowingly agreeing to terms you were otherwise unaware of and unable to overturn without legal action.