Why Does a Business Only Qualify for an MCA?

Securing financing for a business can be a challenging and frustrating task. Many of the questions we receive daily at Capifinders revolve around the financing offers a business receives. Many of these offers involve MCAs or short-term cash advances, which can be frustrating for a business owner, especially because they don't understand the fundamental reasons why they can't access other types of financing. In this article, we want to explain the main reasons why a business may not be able to access other forms of financing:

Poor Credit History:

This is the primary cause. The absence of solid commercial credit and poor personal credit of the business owner. Traditional financial institutions typically rely on a company's or its owner's credit history and their ability to repay a loan based on that history. If a company has a poor or underdeveloped credit history, it's highly likely it won't qualify for a traditional or even alternative loan. In such cases, an MCA might be the only available option since it's more based on future sales than credit history.

Lack of Financial Margin or Profits to Repay a Loan:

Some businesses, in their tax returns or financial statements, may declare losses or minimal profit margins that prevent the lender from seeing sufficient margin to repay a medium- to long-term loan. Thus, the only available option for businesses ends up being income-based financing, namely an MCA, as payments are directly linked to the company's cash flow.

Immediate Funding Needs:

Sometimes, businesses need quick access to funds to seize business opportunities or cover unexpected expenses. Traditional loan application processes can be lengthy and complex, making an MCA an attractive option due to its simplified process and fast approval.

Lack of Collateral:

Many traditional loans, especially those of long-term duration (over 3 years), require collateral, such as physical assets or personal guarantees. For businesses unable to provide this type of collateral, obtaining a traditional long-term loan can be difficult. MCAs often require less collateral since they're more based on the company's future sales.

What to Do When a Business Only Qualifies for an MCA?

It depends on the conditions of each case and the strategy each business owner has, but here are some options to consider:

Take an MCA as quick financing to seize a business opportunity. If a business has an opportunity at hand and doesn't have time for a traditional financing process or doesn't qualify for it, it can take an MCA as a source of financing. Here, the key factors to consider are:

Ensuring that the return on investment (i.e., the profit from the operation for which the funds will be used) is greater than the cost of capital of the MCA.

Ensuring that the return on investment period is shorter than the term given in the MCA.

Take an MCA as a bridge to reach a traditional financing source. It's an option for a business that qualifies for a traditional loan or a long-term loan but doesn't have time to wait for a traditional process or the business opportunity at hand must be seized in a very short term. Once the MCA is taken, it should be refinanced by a bank loan or an SBA loan, allowing the business owner to have seized the business opportunity while also not facing cash flow pressure in the medium term.

Take an MCA and work on improving and strengthening the credit profile. If a business needs financing to seize a business opportunity or to get through a slow season, the best option is to take the MCA, identify together with a financing advisor the reasons why better financing options cannot be accessed, and work on them. This could involve building commercial credit, improving and repairing personal credit, preparing financial statements, enhancing digital presence, among others.

Therefore, it's essential to navigate financing options with detailed advice tailored to your financing needs, ensuring not only the placement of a financial product but also ongoing support to enhance long-term prospects. That's what we do at Capifinders, where we not only facilitate access to loans but also advise, guide, and help you improve in the long term without additional costs. To begin your process, click here.