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MCA Myths, Debunked. Part 3: “The MCA industry is a scam.”

The Merchant Cash Advance (MCA) industry is relatively young, and due to a few bad players—MCA companies that aren’t transparent about their terms and engage in deceptive practices—there is a lot of misinformation floating around about the MCA space as a whole.

With this monthly article series, MCA Myths, Debunked, we aim to bring answers and clarity to the ambiguity and misinformation around MCAs.

In this article, you’ll read information and advice from three MCA industry leaders who have a combined 30+ years of experience in the sector.

Pictured left to right:

Heather Francis, Founder & CEO, Elevate Funding

Ken Peng, Director of Business Development & Marketing, Elevate Funding

Reynold Jackson, Senior Underwriting Manager, Elevate Funding

The main theme we’re exploring today is the idea that the MCA industry is just a big scam. How do you think this myth got its start?

HF: People tend to shy away or demean things they don’t understand —and things that seem “too good to be true”—, which can lead to misconceptions and mislabeling. That is where MCA has been. But I do believe that while the industry is still growing and maturing, the target market is more in the know these days, and that label is being shrugged off the product.

KP: I think there’s a lot of conflation between what is a Merchant Cash Advance and what is a loan product. Of course, when you’re talking about an MCA as a traditional loan, the numbers feel astronomical. A low barrier of entry into the space doesn’t help, as many brokers and even sometimes funders do not fully understand the product or the correct language to describe the way it works. In reality, it’s a purchase of a merchant’s receivables for a short duration of time. Merchants agree to sell these receivables to an MCA company at a discounted price in order to gain access to that money immediately.

RJ: I believe that any product that goes against convention is labeled as a scam at first. People fear things that they do not understand, and MCAs are no exception. Once you take the time to understand what you are fearful of, it usually ends well. Knowing why or how something works helps alleviate the fear of the unknown.

Related to the “scam” topic, there are scenarios where MCA lenders have laid claim to borrowers’ assets for missing a payment. This is due to a practice called COJ (Confession of Judgment). Can you briefly describe COJs and Elevate’s stance on this practice?

HF: A confession of judgment, also known as a COJ, is a legal document and procedure that has the defendant accept liability and the amount of damages that was agreed upon. This procedure helps circumvent normal court proceedings and is a quick process to resolve disputes. This is a legal procedure and document, but the issue comes into play on what is actually being labeled as a default on the contract. Some MCA companies were quick to have the default triggered through a couple of missed payments and removed the ability for a business owner to resolve the issue directly. Elevate does not participate in that practice and exhausts all avenues of resolving any payment or contractual issues before seeking any type of litigation or asset seizures.

KP: COJ stands for confession of judgment. Essentially, it is an admission of liability and failure to abide by contractual terms that allow for the filer to bypass the legal process to satisfy a debt. Unfortunately, some of the bad players in our space use this as a technique to forcefully secure their receivables from merchants at the first sign of trouble. In fact, some of them base their entire business model on making outrageous offers that overextend merchants with the intent of exercising their COJ power. Luckily, this process has been brought to light and states are starting to ban it. Elevate has not and will never make use of COJs.

RJ: COJs are legal documents that some lenders (not only MCAs) have a borrower sign, which foregoes the borrowers right to a “normal” court proceeding to resolve a dispute. A “normal” court proceeding can be lengthy so the benefit of having a signed COJ (to the creditor) is they can quickly freeze your bank account to recoup the defaulted funds. Elevate Funding does not make use of COJs, as it does not make sense for someone to confess that they defaulted before they defaulted. Personally, I would never sign a Confession of Judgment, as I would never forego my right to a fair and just court proceeding. Because of this shared mindset among our leadership, Elevate would never require one of our merchants to sign a Confession of Judgment.

Final talking point for today – why do you think it’s a common belief that all MCA lenders charge exorbitant hidden fees? Do you think that contributes to the “scam” misconception? What measures has Elevate put in place to ensure its merchants don’t feel gouged or taken advantage of?

HF: I believe this is true of any financial transaction; people are always skeptical of hidden fees and transaction costs, and they should be. As a business owner and a consumer, I am always making sure that I know the full extent of any contractual obligation or the cost of the transaction, and I would expect that of others as well. Elevate works hard to provide transparency in every aspect – we disclose fees in the offer letter, on the contract, and in our welcome call. Outside of transparency, we also make sure that any fee assessed outside of the cost of funds is within reason. We do not invent fees just to charge fees. Our fee is based off a cost that is given to Elevate and that we deem to be a shared expense between Elevate and the business owner as a cost of doing business.

KP: Unfortunately, it’s true with a lot of funders in the space. There are a multitude of fees charged, and many times not disclosed until after the contract is signed, or they’re hidden within a multi-page agreement. Elevate has committed to not only being transparent about fee structure, but also keeping it as low as possible. The only fee we assess during the funding process is a flat $350 charge to set up the merchant’s payment method. That’s it. We’ll even waive it for smaller deals or merchants who already use a credit card processor we support. This fee, along with the full terms of the purchase agreement, is listed on a one-page offer sheet we provide on all approvals and includes plain language explaining each amount. Every merchant receives a welcome call directly from our underwriting department prior to disbursing funds, giving us a chance to go over the full terms of the advance, as well as a chance for the merchant to ask any questions.

RJ: I disagree with this question, and I will explain why. People think that MCA funders charge exorbitant fees, as most MCAs do not hide their fees; the fees are provided upfront, and that is different from traditional loans. I have seen contracts from many MCA companies, and most have a page dedicated to explicitly detailing fees. On a traditional loan, the fees are not explicitly detailed (in one location), and the total fees are unknown. Traditional loans only give you an interest rate and how often that interest compounds; it is up to you to determine the fees based on that interest rate. Loan programs [rather than MCAs] truly benefit most from hidden fees, as most people do not take time to calculate the true cost of funds.

As far as MCA fees, I have seen origination fees, underwriting fees, early payment fees, wire fees, and so on, but Elevate does not charge any of those fees. We only have one fee outside of our factor rate, and that is a processing fee that is maxed at $350. For Abound files, that processing fee is maxed at $100, and we waive the processing fee if the merchant switches to one of our approved split processors.

At Elevate Funding, honesty and transparency are at the core of what we do. We genuinely believe that MCA is the best funding option for business owners who find themselves in a variety of circumstances – whether they are in a slump, need quick funds to rectify an unexpected emergency, or if they’re looking to expand and increase their market share.

Our goal? To continue to advocate for our merchants and fund the companies that make America’s small business landscape so interesting, valuable, and diverse.

If you like this article, please tune in for Part 4 on Monday, January 4.

The topic? “Only businesses with bad credit should take out MCAs.”

If you need funding and wish to speak to someone now, please call us at 888-382-3945 or click here to send us an inquiry. One of our teammates will get back to you as soon as they are available.


Revenue-Based Finance is formerly and alternatively known as Merchant Cash Advance, or MCA.