The business owners surveyed in the report mentioned above were candid about why they burdened their own businesses with such a payday loans Delta Ohio financial albatross.
- To finance worsening operations [in other words, prop up a bad situation and make it worse with a very expensive loan],
- To finance fluctuations in working capital ,
- And to use for a specific project or to expand.
As a result, it is not a surprise that the expected loss by the lender is sky high, according to the Pepperdine Study
The median expected loss by the lender is 7.5% of the new MCA loaned. A typical loan loss in a bank averages less than 1% as a comparison, but when the MCA makes 100% interest; I guess a 7% loss percentage is acceptable.
As you will see below, one of the more visible firms in the small business loan sectors actually charge offs are more than twice this 7.5% rate; and I believe the self-quoted data from the MCA industry noted above is understated.
But even more disturbing is the way they are marketed and the lack of accurate and transparent data on what the true costs and APR are. This makes a bad decision even worse, let’s explain why.
Why APR is so important
If you have any type of loan (including a car loan, mortgage or credit card), the lender is required to provide the total cost in writing. As you may be aware, the Truth in Lending Act or TILA is a Federal law passed in 1968 that insures consumers have accurate data about the true cost of a loan so they can make an educated decision.
A key part of TILA is to disclose the amount of your loan, the Annual Percentage Rate “APR”, other charges you may encounter (such as an application fee, late fee, prepayment fee), and the total dollar amount you will pay over the life of the loan.
So when you are shopping around for a loan for your small business, do not get fixated with the lowest monthly payment or even the cheapest rate you are quoted. What you need to know is the true annual percentage rate (APR). This is because an APR calculation has to include all of the costs related to the loan, as I mentioned earlier, this will include interest and other fees.
The MCA industry has chosen to evade the answer to this question by not providing a simple, transparent answer. Instead, they quote their advances using terms like “buy rate”, “factor rate” or “advance rates.” These terms mean nothing when compared to a true APR calculation. In fact, they really mean nothing.
- An MCA is a product where a small business gets capital as an advance, giving up a percentage of their daily credit card receipts, or by giving the MCA access to their bank accounts to withdraw a payment usually daily. I have seen these “buy” or “factor” rates run from 1.2 to 1.5 the amount the MCA agrees to advance.
- Once approved, the MCA will provide the small business an agreed upon amount of money. The MCA then immediately collects their payments from the business daily.
The answer: you can’t – and you won’t hear that from the MCA. This is because the true cost of the MCA depends on how long you take to repay them and the factor rate. The factor rate is the multiplier of the amount advanced that you committed to pay. The unfortunate fact is that the amount you agreed to pay is the same regardless of how quickly you make payments.
