MCA Funding – What is it, what it means and why you should care.

29 February 2024

The abbreviation MCA means merchant cash advance. An American term that was coined from the practice of lending money to retail merchants and taking an agreed % of all card sales as payback for the loan.

If you think about it, banks always need some form of security to give you money, most non–retail businesses have machines, warehouses, stock and debtor’s books etc on which the bank can use as security for their loans. But, what about a business like a restaurant? I can’t exactly give up my patties from my burger shop as security, and there are no massive machines that I need to prepare my burgers? – How do I get a loan without any security? Well, what I do have is predictable cash flows/turnovers and alternative financiers look to that as “security” for the loan. “If this business continues doing what it did in the last 6 – 12 months, will it be able to pay me back a loan?” – enter the Merchant Cash Advance.

The difference in South Africa is that lenders seldom use the card machines as a repayment method – simply put, the big banks control most card machines and they don’t like other lenders interfering with their business- most alternative lenders, therefore, use a debit order to collect from the bank account. So in South Africa, MCA could mean any unsecured business loan and you’ll find many different words or acronyms used to describe them. The key thing is – taking a short-term loan that is unsecured (typically 4-18 months).

So you may be saying to yourself – well you are a business and you have security to offer – why waste my time with alternative lenders when I can go to my bank? Well, at SASFA we always encourage clients to get the cheapest form of funding IF they can access it in time. See most SMEs are banked with one of the big banks and probably have some sort of overdraft in place, perhaps even a term loan. Now, as things happen in the real word, an opportunity presents itself and you need capital there and then – you don’t need the capital forever, you just need it fast so that you can seize the opportunity and make an extra buck. You call the bank, “all operators are currently busy, your call is important to us”. Eventually, you get to someone who is your exclusive banker (they serve about 2000 clients per banker in some banks by the way). The banker needs to connect you with the products team, they need updated information, then there are committees and subcommittees and then by the time you get your money, it’s less than you wanted and the opportunity has long sailed in the sunset. Also, you have now aged 50 years.

Getting an MCA literally takes between a couple of minutes to a couple of days. Most of that time is dependent on you having a few basic documents in order. So if you had all the documents you would have had your money the same day you applied, you would have taken the opportunity, paid back the loan, and stuck the balance of the profit in your back pocket – Business 101.

MCA also gets used in a similar way when there is a problem that arises in the business, typically a machine breaks or there is a seasonal element to trade where some extra cash flow would be nice. This is where things get a little tricky. It’s fine to use short-term unsecured capital to solve a hiccup or problem that is short-term in nature, but as soon as you start living off of debt, things can spiral out of control very quickly. At SASFA, the members are governed by a code of conduct that promotes fair and prudent lending practices. Unfortunately, there are MANY non-SASFA members in the South African market looking to make a quick buck. They will pile so much debt into your business that you’ll spend your business’s next years chasing your tail. At best you get through it and battered and bruised, at worst you don’t get through at all.

Make sure you partner with the correct funding partner. An MCA is an incredibly powerful and flexible product when used for the right reasons and at the right quantum. Visit the SASFA web page for more information on responsible lending by alternative lenders.

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