Why Does a Business Only Qualify for an MCA?

Securing financing for a business can be a difficult and frustrating task. Many of the questions we receive daily at Capifinders revolve around the types of financing offers a business receives.

A significant number of these offers are for MCAs (Merchant Cash Advances), which can be frustrating for a business owner, especially when they don't understand the fundamental reasons why they cannot access other types of financing. Without understanding these reasons, they can't work on addressing them. In this article, we want to explain the main reasons a business might not qualify for other forms of financing:

1. Poor Credit History:

This is the main cause. A lack of strong business credit and poor personal credit of the business owner. Traditional financial institutions typically rely on the credit history of a business or its owner and their ability to repay a loan based on that history. If a business has poor or underdeveloped credit history, it is very likely that it won't qualify for a traditional or even an alternative loan. In such cases, an MCA might be the only option available, as it is more focused on future sales than on credit history.

2. Lack of Financial Margin or Profits to Repay a Loan:

Some businesses report losses or minimal profit margins on their tax returns or financial statements, which prevents lenders from seeing enough margin to repay a medium- or long-term loan. As a result, the only financing option available is income-based financing, meaning an MCA, as the payments are directly linked to the business's cash flow.

3. Need for Quick Financing:

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 quick approval.

4. Lack of Collateral:

Many traditional loans, especially long-term ones (over 3 years), require collateral, such as physical assets or personal guarantees. For businesses unable to provide such collateral, obtaining a traditional long-term loan can be difficult. MCAs generally require less collateral since they are more focused on the future sales of the business.

5. What to Do When a Business Doesn’t Qualify for Anything but an MCA?

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

• Take an MCA as Quick Financing to Seize a Business Opportunity:
  If a business faces an opportunity and doesn’t have time for a traditional financing process or doesn't qualify for one, an MCA can be used as a financing source. The key factors to consider are:

  • The return on investment (ROI) for the operation the funds will be used for must be higher than the cost of the MCA capital.

  • The time frame for the ROI must be shorter than the term of the MCA.

• Take an MCA as a Bridge to Traditional Financing:
  This is an option for businesses that qualify for a traditional loan or long-term loan but need quick financing to take advantage of a short-term business opportunity. Once the MCA is taken, it should be refinanced with a bank loan or an SBA loan, which will allow the business owner to take advantage of the opportunity while relieving 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 take advantage of a business opportunity or to get through a slow season, the best option is to take the MCA. They can then work with a financing advisor to identify the reasons they can't access better financing options and address those, such as building business credit, improving and repairing personal credit, preparing financial statements, and improving digital presence, among others.

More Information

That’s why it’s important to navigate financing options with detailed advice that is tailored to your financing needs. It’s not just about being offered a financial product but working together for the long term. That’s what we do at Capifinders. We not only help you access loans but also provide ongoing advice, guidance, and long-term assistance without extra costs.