Risks of Merchant Cash Advances for Small Businesses

Analysis: An Easy Financing Source Pushes Some Small Businesses Into Bankruptcy Small businesses struggling to find funding have turned to alternative options such as merchant cash advances in recent years. Such deals have threatened the existence of some of these mom-and-pop operations, The Wall Street Journal Pro Bankruptcy reported. More than 100 businesses that filed for chapter 11 since the start of 2023 have attributed their bankruptcies at least partly to cash advances, up from at least 68 for 2022 and 16 for 2021, according to a Wall Street Journal review of court records. A Brooklyn clam bar visited by celebrity chef Anthony Bourdain, Brooklyn retail chain Showfields, known for showcasing local vendors and artists, and, last week, Florida-based countertop maker International Granite & Stone are among those restructuring in chapter 11. These merchant cash financiers, estimated to be about 100 participants, provided $19 billion in 2019, up from $8.6 billion in 2014, according to estimates in a 2023 report published by the U.S. Consumer Financial Protection Bureau. The growth has prompted the Consumer Financial Protection Bureau to try to tighten regulation on the industry, leading the cash providers to fight back in a lawsuit against the regulator. Since the COVID-19 pandemic government financial aid dried up, some companies have sought capital from financiers that provided a lump sum, in exchange for a share of future revenues of the businesses, plus fees. To get repaid, the cash providers can make regular, including daily, withdrawals from businesses’ bank accounts. The popular financing comes at a cost. A 2019 Federal Reserve report said the equivalent annual percentage rates for cash advances can exceed 80% or “even rise to triple digits.” “We frequently see this…that in the last days before a bankruptcy filing, a company got in over its head with these merchant cash advances,” said Bankruptcy Judge Stacey Jernigan during a recent American Bankruptcy Institute event. “They very often seem to be the ones that caused the bankruptcy,” Judge Jernigan said, describing the financing as “pricey” or even “onerous.” Tuesday, February 20, 2024

Small businesses often face a critical challenge when evaluating Merchant Cash Advance (MCA) agreements: understanding the real cost of borrowing. Many MCAs quote their financing using "rate factors" (e.g., 1.4x payback over 39 weeks), leaving borrowers in the dark about the true Annual Percentage Rate (APR) 💡 I’ve encountered countless small business owners trapped in agreements they didn’t fully understand, with some contracts exceeding APRs of 1500%! This lack of transparency is what inspired me to create this Rate Factor to Interest Rate Matrix. 🛠️ How it works: 1️⃣ Find your quoted rate factor (e.g., 1.4x) 2️⃣ Match it to the loan term (e.g., 39 weeks) 3️⃣ Instantly see the equivalent APR/interest rate (e.g., 93.53%) I am showing this example, because I just saw this quoted to a local small business owner 📢 Why this matters: Knowing the actual interest rate empowers small business owners to make informed decisions. It’s time to shed light on these opaque practices and protect entrepreneurs from predatory lending 🚀 What’s next? This matrix focuses on weekly payment MCA loans, but I’ll be sharing future matrices for daily payment MCA loans as well. Stay tuned for more tools to help small businesses navigate financing options with clarity 🤝 Let’s spread the word! Access the matrix here and help make a difference: ✔️ Like this post if you support transparency in small business financing 💬 Comment if you’ve seen or experienced these challenges firsthand 🔄 Repost to expand the reach of this information to small businesses everywhere Note: Reposted as a PDF File. If you’d like the Excel file to verify formulas or expand on this matrix, comment below, and I’ll ensure you’re emailed a copy Together, we can bring clarity and empower small business owners to make informed decisions 🤝 Help spread the word! ✔️ Like | 💬 Comment | 🔄 Repost | 👥 Follow James Jang #SmallBusiness #MCA #FinancialTransparency #BusinessLoans #Entrepreneurship #PredatoryLending #APR #FinancialLiteracy #BusinessFinance #CashFlow #Entrepreneur #Entrepreneurs #innovation #management

That "10% fee" on your merchant cash advance isn't 10% interest. Not even close. This is where smart owners get destroyed—because the math is designed to confuse you. Borrow $100K. Pay back $110K. The MCA company calls it a "10% fee." Your brain hears "10% interest" and thinks: that's cheaper than most credit cards. Wrong. A 10% interest rate means you pay $10K to use $100K for a full year. But MCAs don't give you a year. They often get their money back in 10-20 weeks. If you're paying $110K back over 10 weeks, you just paid a full year of interest in two and a half months. That's not 10%. That's north of 50% APR. But it gets worse. The payment you make in week one? You only had that money for seven days—but you paid 10% on it. That slice of the loan cost you astronomical rates. The payment in week two? You had it for 14 days. Still brutal. Only the final payment—the money you held for the full 10 weeks—approaches the "50% APR" calculation. Everything else is worse. When you do the actual math, that friendly "10% fee" can push 75-100% true APR. Sometimes higher. MCAs aren't inherently evil. They have a place. If you're growing 100% year-over-year and need to float inventory for a proven winner, the speed and accessibility might be worth it. But most owners taking MCAs aren't in that position. They're filling a cash gap. They're covering payroll. They're masking a margin problem. And they have no idea they're paying 80% interest to do it. Three rules before taking an MCA: First, calculate the real APR. Second, model your cashflow for the repayment period. If they're pulling 10% of daily revenue and your margin is 12%, you're running the business on 2% for the entire repayment window. Can you survive that? Third, know exactly what you're buying with that money. Not "inventory" or "runway." Specific SKUs with specific projected returns that will throw off cash before the loan comes due. If you can't articulate all three, don't click the button. Follow myself, @youderian, and @billda (who co-authored this on the eComFuel podcast) for regular content on eCom and building financial mastery.

There's a bunch of money in your corporate account. Great! (right?) Maybe not. As a CFO, most of the thoughts you hear from people about finance is somewhere between these two guys. On one side, debt is good (as long as you make more with the borrowed money than the borrowed money costs you), and on the other, debt is bad. Do we really need to cop out with the typical professional (attorney, accountant, engineer) answer of 'it depends'? In finance, risk can't be eliminated... It can only be mitigated. That means you calculate the downside as well as the upside and make sure the upside is realistic and the downside doesn't wipe you out. And when you borrow money in the form of merchant cash advances (MCAs)... It can be like using a fire extinguisher to warm your hands: Fast, but costly, and dangerous if used regularly. Here's why they can wreck a business if you’re not careful: 1. Insanely High Effective Interest Rates MCAs aren't technically loans. Instead, they're advances on future revenue but the factor rates (e.g., 1.4 on $100k = $140k payback) translate into APRs often 50%-300%+. That’s lethal for cash flow and selling off tomorrow, today. 2. Daily or Weekly Payments You’re making frequent withdrawals from your account, regardless of whether your revenue is consistent. If business slows down, those payments don’t. 3. No Flexibility in Hard Times With a traditional loan, you might renegotiate or defer. With an MCA, you miss a payment, and things escalate fast including collections, damaged credit, lawsuits, and liens. 4. Stacking (and the debt spiral) Desperate businesses often “stack” multiple MCAs to cover payments for the first. Now you’ve got three MCAs pulling daily, and suddenly payroll’s at risk. 5. They Scare Away Real Capital If you're trying to raise a fund or bring in institutional capital, MCA debt on the books is a red flag. Smart money wants to see strategic financial planning, not panic borrowing. 6. Risk to Ownership Many MCAs require a personal guarantee. That means your personal assets are on the hook if the business defaults. Bottom line: If you’re using an MCA to cover operating expenses, that’s not capital strategy, but it is a warning sign. You need either better forecasting, a cost restructure, or to look at real financing options (LOCs, equity partners, even restructuring debt). One MCA might bridge a gap, but three will bury you. Want to talk through a cleaner financing stack?

Bags was featured in Forbes this week. A milestone, sure, but more importantly a great feature on the work we do– and especially about our efforts to protect and save small business owners from predatory merchant cash advance loans (MCAs). Something wild happened afterward… We started getting inbound from MCA lenders who wanted us to send dealflow their way. They led with their origination fee offers (meaning what they’d pay us per deal) and tried to mask very predatory rates under dishonest language. One said they have factor rates “starting as low as” 1.49. 1.49. Over six months. That would mean paying back 149% of the loan amount. Basically 100% annualized interest. It’s usury, which is meant to be illegal. Here’s the problem: MCAs say they aren’t providing loans, so they face less regulation and scrutiny. Around 600,000 businesses take an MCA every year, often getting trapped in a vicious cycle that’s basically impossible to get out of. These loans eat businesses alive. We obviously won’t work with these lenders. But they’re making a killing. Predatory rates mean they have more revenue, which means they have bigger budgets for marketing and customer acquisition. When you look for a business loan, they dominate the results. They’re underregulated, so they’re perfect for a cash grab, which is why brands you trust for valuable services use them to take more of your money. Shopify offers an MCA, Square offers an MCA, QuickBooks offers an MCA. There are highly valued companies that simply offer platforms the ability to embed MCAs. MCAs are everywhere, and they’re all bad. I’ve spoken to a dozen founders this week who are living in an MCA nightmare, and they describe feeling like there’s no way out. 30-50% of their income goes right out the door. They’re cash crunched. They take another MCA loan. Bags is built to be a first port of call for these entrepreneurs, and we know there’s an ecosystem that’s ready to do better by businesses. Better culture, better systems, better outcomes.

A 43 unit Subway franchisee just filed for bankruptcy... The reason behind it should be a warning to any operator facing constrained margins. Zooming out, this is not an isolated failure. Subway has reduced its domestic footprint by more than 25 percent over the past decade, shrinking from over 25,000 stores at its peak in 2015 to under 19,500 by the end of 2024. At the same time, operators have raised concerns about expensive remodel requirements that put additional pressure on already thin margins. Now zoom in. Court filings show this franchisee’s collapse was driven primarily by Merchant Cash Advance loans. MCA financing is not a traditional loan. It is an advance against future sales, repaid through fixed daily or weekly pulls regardless of profitability. When margins tighten, that structure becomes dangerous fast. Cash is extracted before rent, labor, or food costs are covered. In this case, lenders even asserted claims on sales flowing through payment processors, further restricting the operator’s ability to operate. This is not the first time this has happened. Last year, Matadoor Restaurants, a multi-unit Del Taco franchisee, also filed for bankruptcy after MCA loans strained its balance sheet. Different brand. Same capital structure problem. This is where the lesson sits for operators. MCA loans tend to show up when systems are under pressure. Remodel mandates, declining unit economics, or limited access to traditional financing push owners toward fast capital. But fast capital with rigid repayment terms can turn a survivable situation into a terminal one. This is exactly why unit level economics and capital structure deserve more scrutiny than brand headlines. It is also why we spend so much time at Franzy helping operators and buyers understand what is actually happening beneath the surface before decisions get forced. This is not just a Subway story, or a franchising story. It is a warning to business owners about what happens when fragile unit economics collide with expensive capital, and a cautionary tale of what short-term solutions can lead to.

"The Costly Truth About 'Quick Fix' Merchant Cash Advances" Small business owners are no strangers to financial challenges, especially in today's unpredictable economy. When cash flow issues arise, many turn to Merchant Cash Advances (MCAs) for quick relief. They are drawn to MCAs because of their ease of application and fast approval. But as the recent situation involving MyPillow CEO Mike Lindell demonstrates, the "quick fix" of an MCA can quickly spiral into a financial nightmare. In this case, Lindell claims he was misled about the true cost of his MCA agreements. As a result, lenders withdrew millions from his accounts, putting him in a financial bind. Although his claim that an MCA vendor charged him 409% interest seems outrageous, I cannot help but believe it. MCAs are notorious for hidden fees and atrocious rates. His legal battle highlights a significant problem: the lack of transparency and astronomical effective costs hidden in MCA agreements. What Makes MCAs So Dangerous? Opaque Pricing: Unlike traditional loans, MCAs often obscure their true cost. High fees and daily repayments make it nearly impossible to calculate the actual annual percentage rate (APR), which can soar to triple digits. Aggressive Collections: Lenders withdraw payments directly from your bank account, often daily, leaving businesses with little room to manage other expenses. No Regulation: MCAs are not governed by the same consumer protection laws as loans, leaving businesses vulnerable to predatory terms. There Are Better Options If your business is facing cash flow issues, you don’t have to settle for risky, high-cost solutions like MCAs. Invoice Factoring offers a smarter alternative: Transparent Costs: No hidden fees or surprise withdrawals. Improved Cash Flow: Unlock funds tied up in unpaid invoices without taking on debt. No Daily Payments: Factoring is tied to your receivables, not your bank account. According to a recent report by Grand View Research, the invoice factoring market is expected to grow to $4.2 trillion by 2028, as more businesses recognize its benefits over high-risk financing options like MCAs. Protect Your Business Before signing any agreement, ask yourself: Do I fully understand the total cost? Will this solution improve my cash flow—or make it worse? Don’t let the lure of quick cash jeopardize your financial stability. Take a moment to explore safer, more sustainable options. Invoice factoring could be the lifeline your business needs, without the hidden dangers. Let's connect if you’re curious about how invoice factoring works or how it could help your clients. I have added a link to the Mike "My Pillow" Lindell article in the comments. #cashflow #SMBs #MCA

When a 43-unit Subway franchisee files for bankruptcy, not because of bad food or empty restaurants, but because merchant cash advances with interest rates north of 94% drained every dollar of cashflow, it should stop everyone in this industry cold. That's exactly what happened to MTF Enterprises. And they're not alone. A Del Taco franchisee took out $2.7 million in advances from nine different entities. Fat Brands, operating 16 restaurant chains, needed as much as $15 million in MCAs just to keep the lights on. These aren't mom-and-pop operators making desperate, uninformed decisions. These are large, multi-unit franchisees — sophisticated businesses that, by every traditional measure, should have access to conventional capital. So why are they turning to what amounts to legal loan sharking? I won't belabor the terrible economics of merchant cash advances. That ground is well covered. What I want to talk about is what this trend actually signals for the franchise industry, because it's telling us two things that nobody seems willing to say out loud. First, lending has tightened dramatically. I've watched it happen across my own practice over the last two years. Small and mid-sized franchise operators are increasingly locked out of traditional financing altogether. When established, multi-unit operators are resorting to MCAs, that's not an isolated story of poor judgment — it's confirmation that the capital pipeline is constricting in ways that will stall growth, kill expansion plans, and cost jobs. If you're a prospective franchisee building a pro forma that assumes easy access to credit, recalibrate now. Second, and this one should sting, many of the largest franchise systems have built sophisticated integrated revenue tracking and financial reporting tools that monitor franchisee performance in real time. They know what their operators are earning. They know the margins. They can see stress forming before it becomes a crisis. And yet, what are they doing with that data? In too many cases, absolutely nothing proactive. If a franchisor can track your daily sales down to the penny but won't pick up the phone when your numbers signal distress, you have to ask: who is that reporting actually serving? Franchise systems that treat financial oversight as a compliance exercise rather than a support mechanism are failing their networks. Transparency without action is just surveillance. If you're evaluating a franchise opportunity, ask hard questions about what happens when operators struggle. Ask what the franchisor does with the data it collects. And if the answer is silence, that tells you everything you need to know. #franchiselaw #franchising #businessstrategy #franchiseinvestment #restaurantindustry