Beware of MCAs, the Payday Loans for Businesses
9/17/2025
In each issue of The RMA Journal, veteran workout leader Jason Alpert gives advice on thorny workout challenges. Have a challenge you would like Jason to address? Send your question to WorkoutWindow@rmahq.org.
QUESTION: A middle-market manufacturer has a $7 million revolver and a $3 million term loan with us. They’ve recently stacked two merchant cash advances (MCAs) totaling $1.5 million. Payments on those MCAs are hitting their operating account daily, and it’s starving their liquidity. The borrower hasn’t defaulted yet, but our borrowing base is under pressure, and the company’s CFO admitted they turned to MCA financing because we wouldn’t increase their line. How should I handle this situation? Do I call a default, force a lockbox, or is there another way to unwind the MCA exposure without pushing them into bankruptcy?
JASON: Yikes — your borrower has put themselves between a rock and a hard place by taking out a hard-money “loan” in the form of an MCA. Before I offer my take, including why I put the word “loan” in scare quotes, here’s a quick primer on MCAs for any readers who may not be familiar with them:
While MCAs have technically been around since the 1990s, they exploded in popularity after the Great Recession when banks tightened credit and fintech players flooded the small business market with promises of fast cash and no-questions-asked approvals. They’re marketed as liquidity lifelines, but make no mistake: MCAs are payday loans for businesses. And just like payday loans, they’re quick, expensive, and can be devastating.
Here’s why. MCAs live in a legalistic gray zone. They’re structured not as loans, but as “purchases of future receivables.” That legal fiction lets MCA providers avoid usury caps and disclosure rules.
But the economics tell the real story. Instead of an interest rate, MCAs charge a “factor rate.” For example, a 1.3 factor on a $1 million advance means $1.3 million must be repaid — regardless of how quickly it’s collected. Translate that into APR and you’re talking 60% to 150% in most cases, with extreme examples having effective rates north of 200%. Combine that with daily or weekly ACH debits, and liquidity bleeds out of the business faster than management can plug the hole.
A business that relies on MCAs can face a triple whammy:
- Sky-high borrowing costs
- Operating accounts drained by constant debits
- Clouded collateral from Uniform Commercial Code (UCC) filings.
More on No. 3: MCA documents look and act a lot like loan agreements by including personal guarantees, confessions of judgment, and UCC-1’s against receivables and deposit accounts. I’ve seen situations where the UCC-1 isn’t even filed by the MCA provider itself but by a third-party servicer, further muddying title. That slows down refinancings, complicates note sales, and jams up any transaction where clean lien searches matter. Attorneys I’ve talked with, on both the creditor and debtor side, agree that the use of MCAs is a flashing red light, more like a fire alarm than a red flag, when it comes to borrower distress.
Back to your current challenge: Now that you know the borrower has a significant $1.5 million MCA, the bank needs to take immediate action. Step one: Downgrade the loan and move it into workout. The presence of an MCA is very likely an event of default under the bank’s loan documents that require “no additional indebtedness” and “no additional liens.” That means default letters need to go out quickly to protect the bank’s rights. Don’t sit on these defaults. Time is not your friend when an MCA is involved.
Step two: Engage with the borrower immediately. Pin down what led to the cash crunch, require updated financials, and get their plan to resolve the default. The CFO has already admitted they turned to MCA financing because the bank declined a line increase. That admission cuts both ways. The bank needs to ensure its decline was properly documented to avoid lender liability. It should also confirm whether the borrower was transparent about what they would do if the bank said no. If the manufacturer represented that they’d pursue a conventional refinance but instead back doored into MCA financing, that misrepresentation needs to be documented and the bank should consider if it reflects a character issue with management/ownership.
Assuming no lender liability issues and no deliberate misrepresentation, the bank still has to chart a path forward. A forbearance agreement may make sense, giving the borrower breathing room to refinance, sell assets, or bring in equity to clear the MCA. Any forbearance must include consideration to the bank including increased financial reporting, credit enhancements, tighter covenants, and, most importantly, cash dominion. Re-establish control over operating accounts and make sure bank debt gets paid before the MCA does. In more extreme situations, if collateral and cash flow support it, the bank might even consider a protective advance, increasing its exposure, to retire the MCA before it takes down the entire business. If none of those options are feasible, a note sale might be the most efficient exit.
This is also a wake-up call to fine-tune your MCA radar before other credits get this far. The tell-tale signs are there if you look closely: a sudden large deposit followed by daily or weekly debits to the same entity, overdraft and nonsufficient funds activity spiking, a balance sheet with mysterious short-term liabilities, or borrowers who suddenly get cagey about providing full account statements. Spotting these patterns early can mean the difference between a manageable workout and a full-blown collapse.
And don’t underestimate the educational role bankers can play with clients. Borrowers often turn to MCAs out of desperation or ignorance. Proactively warning them about the dangers, the crushing costs, the loss of liquidity, and the effect on bank relationships can prevent problems before they start. Many small business owners think they’re solving a cash crunch when in reality they’re heading down a much-worse path.
Left unchecked, they don’t just damage the borrower, they impair collateral, gum up lien searches, and drag the bank into a messy, time-consuming fight for repayment. The sooner you intervene, the better your odds of helping the borrower escape an MCA’s clutches and preserving value for the bank.
Jason Alpert is managing partner at Castlebar Holdings, a distressed debt fund and financial institution advisor. Jason led and managed workout and special asset teams at major financial institutions for two decades. He is on the editorial advisory board of The RMA Journal and is an adjunct professor at the University of Tampa. Email Jason at jason@castlebarholdings.com or reach out to him at 813-293-5766.
Disclaimer: The Workout Window is not intended nor is it to be considered legal advice. As The Workout Window stresses, consult with legal counsel and your institution’s management to be sure you are acting within the parameters of your institution’s policies and banking law.
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