Spotting MCA Trouble Before It Spreads

Merchant cash advances (MCAs) may look like quick liquidity, but for banks they’re warning signs of distress. In Jason Alpert’s recent “Ask the Workout Window” column, he explains why MCAs are “payday loans for businesses” and what lenders should do if they show up in a portfolio. 

Why MCAs Are So Risky 

MCAs aren’t technically loans—they’re structured as “purchases of future receivables,” which lets providers skirt usury caps and disclosure rules. The economics, though, are brutal. Instead of interest, they use a “factor rate.” A 1.3 factor on a $1 million advance means $1.3 million must be repaid—regardless of speed. Translated into APR, that’s often 60%–150%, with extremes north of 200%. Add in daily or weekly ACH debits, and liquidity drains fast. 

Borrowers also face a triple whammy: 

• Sky-high borrowing costs 

• Operating accounts bled by constant debits 

• Clouded collateral from UCC filings, sometimes by third-party servicers 

According to Alpert, many experts say MCAs are more like a fire alarm than simply a red flag. 

What Banks Should Do 

If you discover an MCA in a borrower’s capital stack, time is not your friend. Alpert advises downgrading the loan and moving it to workout immediately. Default letters should go out quickly, since MCAs usually violate “no additional indebtedness” or “no additional liens” covenants. 

Next steps include: 

• Engaging with the borrower on what led to the cash crunch 

• Requiring updated financials and a plan to resolve the default 

• Considering a forbearance agreement—with tighter covenants, stronger reporting, and especially cash dominion 

• In some cases, taking a protective advance to retire the MCA before it sinks the business 

If no path works, selling the note might be the cleanest exit. 

Get Ahead of the Problem 

MCAs often hide in plain sight. Watch for sudden deposits followed by daily debits, unexplained short-term liabilities, or borrowers reluctant to share full statements. Educating clients is also key—many don’t understand how destructive MCAs are until it’s too late. 

Left unchecked, MCAs don’t just damage the borrower—they impair collateral, gum up lien searches, and drag banks into messy fights for repayment. Alpert stresses that the sooner you intervene, the better the odds of preserving value for both borrower and bank.