Does the SBA Back Merchant Cash Advances?

Merchant cash advances have become an increasingly popular form of alternative financing for small businesses in recent years. But does the Small Business Administration (SBA) back these types of financing products?

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a form of financing where a company provides a lump sum of capital to a business in exchange for a percentage of future credit card sales over a set period of time.

Unlike a traditional term loan, merchant cash advances do not have fixed monthly payments or interest rates. Instead, the business repays the advance through daily or weekly debits from their credit card receipts until the full amount is paid back, plus a fee that is usually equivalent to a high annual percentage rate.

Merchant cash advances are often appealing to small businesses because they can access capital quickly and the underwriting is based more on credit card sales volume rather than personal credit scores. However, critics argue MCAs can be predatory due to their high costs and unregulated nature.

Does the SBA Back Merchant Cash Advances?

The short answer is no – the SBA does not back or guarantee merchant cash advances. The SBA has specific loan programs, like 7(a) and 504 loans, that provide government-backed financing to small businesses, but MCAs do not fall under these programs.

Some of the key reasons the SBA does not back merchant cash advances include:

• MCAs are not considered loans: The SBA guarantees loans, but MCAs are structured as purchases of future receivables. This technical difference means MCAs do not qualify for SBA guarantees.
• High cost: SBA lending programs have limits on rates and fees to protect borrowers. MCA costs often equate to APRs over 50%, exceeding SBA thresholds.
• Shorter terms: SBA-backed loans have longer terms of 10+ years. MCAs must be repaid much faster, often in under a year.
• Lack of regulation: The SBA heavily regulates lenders in its programs. MCAs operate with less oversight as commercial transactions.

So in summary, the unconventional structure, high costs, and unregulated nature of merchant cash advances do not align with the SBA’s lending principles and qualifications. While the SBA does not back them, MCAs may still fill a need for some small businesses unable to qualify for other financing.

SBA Loan Programs vs. Merchant Cash Advances

To understand why the SBA does not back merchant cash advances, it helps to compare the key features of SBA loans versus MCAs:

SBA 7(a) Loans

The SBA’s 7(a) loan program is its primary program for providing small business loans. Here are some characteristics:

• Loan amounts up to $5 million
• Long repayment terms of 10-25 years
• Competitive interest rates capped at prime + 2.75%
• Low origination fees capped at 2.7% of loan amount
• Backed by SBA guarantees up to 85% – 90% of loan

SBA 504 Loans

SBA 504 loans are used for major fixed assets like real estate or equipment. Features include:

• Loan amounts up to $5 million
• Long repayment terms of 10-20 years
• Below market fixed interest rates
• Backed by SBA guarantees up to 40% of loan

Merchant Cash Advances

In contrast, here is an overview of merchant cash advances:

• Advance amounts from $5,000 – $500,000
• Short repayment terms of 3-18 months
• Expensive – equivalent to 36% – 99%+ APR
• No collateral required
• No SBA or government guarantees

Comparing these financing options makes it clear that MCAs differ significantly from SBA programs in their structures, costs, terms, and oversight. That is why they do not qualify for SBA backing.

Alternatives to Merchant Cash Advances

Since the SBA does not guarantee merchant cash advances, what are some alternatives small businesses can consider?

SBA Loans

One option is to apply for SBA 7(a) or 504 loans. If qualified, small businesses can benefit from low interest rates, long repayment terms, and SBA guarantees. The application process is more extensive than MCAs but offers more affordable financing.

Business Credit Cards

Business credit cards are another way to access capital that may be cheaper than MCAs. Interest rates are often lower and rewards can offset some costs. Downsides include lower limits and variable rates.

Business Lines of Credit

A business line of credit provides revolving access to capital up to a set limit. Interest rates are usually competitive and you only pay on what you use. Approval may be easier than larger SBA loans.

Alternative Lenders

Online alternative lenders may offer more flexibility than banks with faster approvals. Rates can be high so compare options carefully before committing.

Payment Processing Loans

Some merchant processors like PayPal offer business financing programs tied to payment processing volume. These may have more competitive rates than standard MCAs.

The Bottom Line

While merchant cash advances allow small businesses to quickly access capital, the SBA does not back these products due to their unregulated nature and high costs. Small businesses should understand all their financing options, including more affordable SBA loans. MCAs involve expensive fees and strict repayment terms, so all alternatives should be considered first.

Ultimately, there is no one-size-fits-all solution. But being informed about the differences between merchant cash advances and SBA products allows small businesses to make the best financing decision for their unique situation and needs.

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