Short Term Funding: When and How to Use It Wisely

In the trucking industry, where cash flow is as dynamic as the roads traveled, finding reliable and swift financial solutions is a key aspect of business management. Among the various financing options, Merchant Cash Advances (MCA) have emerged as a popular choice for many trucking professionals. However, this popularity comes with significant caveats. MCAs, while offering quick access to funds, often carry terms and conditions that can lead to long-term financial strain.

In this comprehensive exploration, we dive deep into the world of MCAs, particularly focusing on their impact within the trucking industry. We aim to unravel the complexities of MCAs, shedding light on why they might seem appealing at first glance but can potentially lead trucking businesses into a quagmire of financial challenges.

This guide also delves into the darker aspects of the MCA industry. We’ll discuss the prevalence of predatory practices, highlight the often aggressive and ruthless collection methods employed by some MCA providers, and examine the harrowing consequences of defaulting on these advances. Real-life cases and articles, especially those centering around the trucking sector, will be cited to illustrate these points vividly.

Merchant Cash Advances (MCA) are a form of short-term funding often used by businesses, including those in the trucking industry, for immediate capital needs. Unlike traditional loans, an MCA is essentially an advance based on the credit card sales deposited in a business’s merchant account. Here’s a closer look at how they work and their specific implications in trucking:

• Advance Amount: The MCA provider offers a lump sum payment to a business in exchange for a percentage of future credit/debit card sales or receivables.

• Repayment Method: Repayment typically involves daily or weekly deductions from the business’s bank account, based on an agreed-upon percentage of sales.

• Factor Rate: Instead of a traditional interest rate, MCAs use a factor rate, which is a numerical figure that, when multiplied by the advance amount, determines the total amount to be repaid.

In trucking, MCAs might be sought for a variety of reasons, such as:

• Quick repairs or maintenance of vehicles.

• Immediate fuel costs or other operational expenses.

• Bridging gaps between customer payments or during slow seasons.

• Cost: MCAs can be significantly more expensive than traditional loans due to high factor rates and additional fees.

• Repayment Frequency: The frequent repayment schedule (daily/weekly) can strain the cash flow of a trucking business, especially one with fluctuating income.

• Bridging gaps between customer payments or during slow seasons.

Understanding MCAs is crucial for truckers, as the decision to use this type of financing can have significant and lasting impacts on the financial health of their business. It’s essential to weigh these factors carefully and consider whether the immediacy of funds outweighs the potential long-term costs.

While Merchant Cash Advances (MCAs) come with their fair share of risks, there are scenarios where they can be beneficial if used correctly and wisely. This section explores the potential advantages of MCAs, providing examples of situations where they could offer a suitable financial solution for trucking businesses.

• Fast Funding: MCAs provide quick access to funds, often within a few days. This is particularly beneficial in situations where immediate cash is needed and traditional financing options might be too slow.

Example: A trucking company faces an unexpected opportunity to take on a large, profitable contract but needs immediate funds to cover upfront costs like fuel and temporary staff hires. An MCA can provide the necessary capital quickly to seize this opportunity.

• Easier Qualification: MCAs typically have less stringent approval criteria compared to traditional loans. They can be accessible to businesses with less-than-perfect credit or those that haven’t been in operation for a long time.

Example: A relatively new trucking company with a limited credit history struggles to secure a bank loan. An MCA provides the necessary capital to bridge short-term cash flow gaps, allowing the business to continue operations and build its credit profile.

• Alignment with Cash Flow: The repayment of an MCA is generally tied to the business’s sales, which can be beneficial for businesses with fluctuating income.

Example: A trucking business experiences seasonal fluctuations in cash flow. The flexible repayment structure of an MCA, which adjusts with the company’s income, allows the business to manage repayments more effectively during off-peak seasons.

• Unsecured Funding: MCAs usually do not require collateral, which can be advantageous for businesses that do not have significant assets to offer as security.

Example: A small trucking operator, lacking substantial assets, needs a quick infusion of cash to repair critical equipment. An MCA provides the necessary funds without the need for collateral, which the business may not have.

• Opportunity for Expansion: When used strategically, MCAs can provide the necessary capital for businesses to explore growth opportunities that would otherwise be inaccessible.

Example: A trucking business plans to expand its fleet but lacks the necessary capital for a down payment on new trucks. An MCA can fill this gap, enabling the business to grow and potentially increase its revenue significantly.

The Merchant Cash Advance (MCA) industry, while offering a quick-fix solution for immediate capital needs, harbors a dark side that trucking businesses must navigate with caution. This segment delves into the more troubling aspects of MCAs, particularly focusing on aggressive collection practices and the potential legal entanglements that can ensnare unwary businesses.

• Exorbitant Costs: MCAs come with high factor rates, making them much more expensive than traditional loans. The effective annual percentage rate (APR) can be exorbitantly high.

• Daily Repayment Pressure: The frequent repayment schedule can create significant cash flow pressure, especially during slow business periods.

• Cycle of Debt: The ease of accessing MCAs can lead to a cycle of dependency, where trucking businesses continually rely on future advances to cover existing MCA debts.

For trucking businesses, the decision to take an MCA must be approached with a thorough understanding of these risks. The immediate financial relief must be weighed against the potential for long-term financial strain and the reality of the MCA industry’s practices.

The MCA industry is notorious for some bad actors and practices that can be detrimental to trucking businesses. We could write a whole entire article on how common this is (and may in the future), and while there are many MCA companies that operate within the ‘high risk’ space,  the bigger problem is that the industry is filled with unscrupulous brokers who will do anything to make a sale. How unscrupulous? Well imagine if a freight broker and a used car salesman had offspring. This offspring would be an MCA broker. 

How unscrupulous?  Imagine if a freight broker and a used car salesman had offspring. And this offspring was abused as a child. And then it got bit by a dog and got rabies. And when this offspring grew up it watched the Wolf of Wall Street and thought it was a feel good movie. This offspring would represent about 90% of all MCA brokers. 

• Aggressive Sales Tactics: Some MCA providers use high-pressure sales tactics to convince trucking businesses to take on advances that aren’t in their best financial interest.

• Lack of Transparency: The costs and terms of MCAs are often not clearly explained, leading to trucking businesses being unaware of the true cost of the advance.

• No Regulation: Unlike traditional loans, MCAs are not bound by the same regulatory standards, which can lead to unethical lending practices.

• Daily Debits: MCAs often involve automatic daily debits from business accounts, which can quickly escalate into a financial nightmare if a business’s cash flow is disrupted.

• High-Pressure Tactics: Some MCA providers are known for their relentless pursuit of repayments, using tactics that can border on harassment.

• Personal Guarantees: Often, MCA agreements include personal guarantees, which means personal assets might be at risk if the business fails to make repayments.

Many MCA companies will not hesitate to seek a legal remedy against a default, often regardless of the circumstances of the borrower.  In my career as a lending consultant, I have seen some bottom feeder MCA companies (and their bottom feeder attorneys) cash strap trucking companies so badly to the point that the trucker had no choice but to close down.  They will literally go after everything- bank accounts, cash apps, assets, the kitchen sink, you name it.  

Truckers are advised to hire an attorney if these tactics are being levied against them, and in most cases, the attorney can stop the practices and keep the trucker solvent. However, attorneys cost money and cash strapped truckers may be hard pressed to be able to come up with the funds to do so.  It’s better to avoid it happening in the first place, than to have to go through all of the effort, stress and financial cost to stop it. 

• Confessions of Judgment: Some MCA contracts include a ‘confession of judgment’ clause, where the borrower waives their legal rights in disputes. This can lead to swift and often one-sided legal actions against the borrower.

• Lawsuits Against Aggressive MCA Providers: There have been numerous lawsuits filed against MCA providers for their overreaching and often illegal collection practices. These lawsuits highlight the need for regulatory scrutiny in the MCA industry. At the end of the article we have provided 3 such cases for review.

• Impact on Personal and Business Reputation: Legal entanglements with MCA providers can damage both the personal and business reputation, making future financial dealings more challenging.

Defaulting on a Merchant Cash Advance (MCA) can lead to severe repercussions for trucking businesses, often far beyond the immediate financial strain. This section highlights the real-life consequences of defaulting on MCAs, supported by actual cases and experiences from the trucking industry.

• Aggressive Collection Efforts: MCA providers are known for their aggressive collection tactics. Defaulting businesses often face relentless calls and legal threats, which can be stressful and disruptive.

• Legal Action and Judgments: Providers may swiftly move to legal action, and due to the ‘confession of judgment’ clauses often embedded in MCA agreements, trucking businesses can find themselves on the losing side of a court judgment without a fair hearing.

• Seizure of Assets: In extreme cases, MCA providers may attempt to seize business assets, including trucks and equipment, to recoup the owed amount, directly impacting the operational capacity of the business.

• Personal Guarantees: Many MCAs require personal guarantees, meaning that the business owners’ personal assets, including savings and property, may be at risk.

• Credit Damage: Defaulting on an MCA can severely damage both the personal and business credit scores of the owner, limiting future financing options.

One of the most perilous aspects of Merchant Cash Advances (MCAs) is the common practice of renewing these advances, often leading trucking businesses into a continuous cycle of debt. This section examines how the renewal process works, why it’s frequently used, and its long-term financial implications for trucking businesses..

• What is Renewal? Renewal of an MCA involves taking a new advance to pay off a previous one. This is often presented as a solution when a business struggles to meet the repayment terms of the original advance.

• Ease of Renewal: Many MCA providers make the process of renewing an advance straightforward, often marketing it as a benefit or a sign of a good lending relationship.

• Immediate Relief: The promise of immediate financial relief can be enticing, especially when facing the pressure of current repayments.

• Lack of Alternatives: Trucking businesses, particularly those with cash flow challenges or poor credit, might see MCA renewal as the only available option to manage their financial situation.

• Compound Fees and Interest: Each renewal often comes with additional fees and higher factor rates, significantly increasing the total amount to be repaid.

• Debt Cycle: The ease of renewing an MCA can lead to a cycle of dependency, where businesses find themselves continuously renewing advances to cover the previous ones, trapping them in perpetual debt.

• Long-Term Financial Strain: This cycle can cripple a business’s long-term financial health, consuming more and more of its revenue and hindering growth or stability.

For trucking businesses seeking short-term funding solutions, it’s crucial to explore alternatives to Merchant Cash Advances (MCAs) that offer less risk and more sustainable financial health. Obviously, part of the allure of an MCA is that it is often the only source of capital available for truckers with banged up credit or short time in business.  But, and our experience as shown this countless times, truckers are sometimes too quick to jump on an MCA, when with just a little more information (or perhaps know-how) a more sensible lending type might have been available. This section outlines various financing options that can serve as safer and more beneficial choices for truckers in need of capital.

• Lower Interest Rates: Often come with lower interest rates compared to MCAs.

• Fixed Repayment Schedule: Provides a clear timeline for repayment, aiding in financial planning.

• Challenges: May require good credit history and more time for approval, which could be a hurdle for some trucking businesses.

• Lower Interest Rates: Allows businesses to draw funds as needed up to a certain limit, offering flexibility similar to MCAs but usually at a lower cost.

• Interest on Used Funds Only: Interest is typically charged only on the amount drawn, not the entire credit line.

• Requirements: Might require a good credit score and financial history for approval.

• Specific Use: Ideal for purchasing or upgrading trucks and other equipment.

• Asset as Collateral: The equipment itself often serves as collateral, potentially lowering the risk for lenders.

• Immediate Cash from Invoices: Involves selling your invoices at a discount in exchange for immediate cash.

• No Debt Incurred: Since it’s not a loan, there’s no concern about interest rates or debt cycles.

The critical takeaway for trucking business owners is the importance of being fully informed and cautious when considering MCAs as a financial solution. The allure of quick access to capital can be overshadowed by the long-term financial burden imposed by high factor rates, aggressive repayment schedules, and the risk of falling into a debt cycle. Trucking companies are encouraged to approach MCAs with a high degree of scrutiny and to seek financial advice from trusted sources to ensure that they make decisions that are in their best long-term interest.