Why ACH and MCA Loans Aren’t Your Best Option


Automated Clearing House loans and Merchant Cash Advances are two popular financing products for businesses. They’re common options because they’re easy to qualify for, and business owners typically see these products as convenient.

However, ACH and MCA loans might not be your ideal options. Here is what you should know about these types of financing products and how they can limit your cash flow.

What Is an ACH Loan?

An Automated Clearing House loan is a type of financing product that gives you access to capital you can use for a wide range of needs.

The lender withdraws a specific sum from your business checking account. In most cases, a monthly payment for a set amount will come out of your account automatically.

The automated payments are convenient and help you make payments on time, and you will know exactly how long it takes to pay the loan back when you apply for it.

What Is an MCA Loan?

A Merchant Cash Advance is a similar type of loan where you get a lump sum of cash as an advance on future sales you will make. The merchant part refers to credit and debit card sales.

Your payments will come out as a percentage of your credit and debit card sales. A percentage of your receipts will be deducted on a daily, weekly, or monthly and go toward your MCA balance.

ACH and MCA loans are usually easy to qualify for because lenders see these products as low-risk financing options since they will receive payments through automated withdrawal or by taking a percentage of your sales.

Important Drawbacks to Consider

Over the years, ACH loans, also known as “payday loans”, have gotten the reputation of being predatory. They can trap people into high interest rate loans that will never be paid off. In some circumstances, interest rates can increase up to 1000 percent over the term of the loan. Because these loans are fast and easy to get approved, businesses can fall victim to these predatory practices in desperate times.

Furthermore, there is no federal cap on the interest rate of an ACH loan. Only 15 states require an interest rate cap for payday lending.

ACH and MCA loans usually have higher origination fees when compared to other products. The application process is quick and easy, but lenders charge more for these products.

Another drawback is that the repayment systems limit your cash flow. You have very little control over your payments, and money will come out of your business account or sales no matter what happens.

Why Is Limiting Your Cash Flow an Issue?

If you borrow money through an ACH, the lender will withdraw a set amount from your account each month, regardless of what your sales numbers are for that month.

A lot of businesses see seasonal patterns. You might have a few slow months and make a lot more sales during the summer or around the holidays, depending on your industry.

There are many factors that could impact your sales, and some of them are difficult to predict. A competitor could release a new product or promotional offer that causes you to lose out on a lot of sales.

A major client being late for paying a large invoice can limit your cash flow, or your website could be down for a couple of days and result in lower sales numbers than usual.

No matter what happens, the money will come out of your account or sales, and you could be left with a negative cash flow.

Balancing your cash flow is crucial for a healthy business. In a perfect world, you would always have a positive cash flow and make enough sales to take care of your financial obligations immediately. The reality is that sales are going to vary.

You can plan strategically by putting money aside for upcoming expenses, or borrowing money to take care of financial obligations or investments if you can expect a positive cash flow in the future.

Products like ACH and MCA loans limit your cash flow and can put you in a position where you’re unable to meet your financial obligations and have to borrow more money to keep up with payments. A lack of liquidity makes it difficult to react as your market evolves, and leaves you with very little breathing room if you have a slow week or if a customer is late for paying a large invoice.

Alternatives to Consider

There are other options to consider if you need access to financing, particularly if you’re looking to fund a startup. A business credit line is a flexible option that gives you access to cash advance and a line of credit you can use to finance major purchases. You can borrow more money as needed and make monthly payments that vary depending on your cash flow available.

Asset based lending can be practical for businesses with heavy equipment, machinery, vehicles, real estate or other large assets to borrow against. This type of lending holds your assets as collateral. This is typically structured as a revolving line of credit based on the value of your assets.

Invoice factoring is another option that won’t limit your cash flow or your credit. You can use the services of an invoice factoring company to sell your invoices and get a cash advance instead of waiting for customers to pay invoices. It’s a solution that will ensure you always have a positive cash flow, and you can rely on it to offset the obligations of an existing ACH or MCA loan.

The Bottom Line

ACH and MCA loans are a quick method for cash flow infusion. However, these loans are likely not the best option for your business, as they come with extremely high interest rates and limited regulation. The bottom line is that there are likely better methods of securing cash flow for your business. If you do enter into an ACH or MCA loan agreement, make sure you read the fine print and are aware (up front) of any and all fees you may be charged.


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