How to Cover Payroll With a Real Loan (Not a Merchant Cash Advance)

TL;DR

• Reaching for an MCA when payroll is tight is the most expensive decision a trades operator can make. There are four real options that cost a fraction of what an MCA does — but you need to set them up before the crunch hits.

• The MCA looks like a 24-hour fix. The math says it costs 60 to 350 percent APR.

• Four legitimate alternatives: working capital line, SBA Express, invoice factoring, equipment-collateralised line.

• The right time to set this up is when you don't need it. The wrong time is the Wednesday before payroll.

Why operators reach for an MCA - and why it's a trap

It's Wednesday. Payroll is Friday. The customer that owes you $80K hasn't paid. You log onto Google, type fast small business loan, and get fifteen results that all promise funding in 24 hours.

You call the first number. They're nice. They ask for three months of bank statements. They pre-approve you in an hour. The contract arrives by the afternoon. You sign. The money is in your account by Thursday morning.

You also just signed up for what is probably a 90 to 250 percent APR loan, with daily debits from your operating account starting Monday morning, that will take a slice of every dollar that comes in for the next 9 to 12 months. By month three, your cash flow is worse than it was on Wednesday. By month six, you're considering taking a second MCA to pay the first.

This is how trades businesses end up in MCA stacks. Not because the operator is reckless - because the operator was running a real business and got caught in a real cash crunch with the wrong tool in reach.

MCA vs bank loan - what the math actually looks like

Same $100K. Same nine months. Different products. Here's what each one costs.

MCA at a 1.40 factor rate: you owe $140,000 total. The cost of capital is roughly 90% APR. You repay through daily debits from your operating account. Funding takes 24 to 48 hours. The MCA stacks on your file and signals distress to future lenders. Origination fees are high.

Working capital line of credit: total repayment is roughly $104,500. Cost of capital is 9 to 12 percent APR. You pay interest only on what you draw, monthly. Funding takes 5 to 10 business days. It builds your business credit. Free with Frank, paid by the bank on funded deals.

SBA Express loan: total repayment is roughly $105,000. Cost of capital is 11 to 13 percent APR. Monthly amortising payments. Funding takes 30 to 45 days. It builds your business credit. Free with Frank.

The MCA costs roughly $35,000 more for the same $100,000 of capital. That's a tech for half a year. That's a truck. That's a vacation you'll never take.

The trap: the MCA's daily debit means by the time you realise it's strangling you, you've already paid back half the principal. There's no good exit - only refinancing into something cheaper, which most banks won't do once they see daily debits on your statements.

The four real options for covering payroll

Option 1: Working capital line of credit. This is the answer for most trades operators most of the time.

A working capital line is like a credit card for your business - except instead of 22 percent APR, it's 9 to 12 percent. You're approved for a number (say $100K), you only pay interest on what you draw, and you pay it back when collections come in. When the AR cheque hits, you pay down the line. Next time you're tight, you draw on it again.

The catch: you need to set it up before you're in trouble. Banks won't approve a line for an operator whose bank statements show payroll bouncing. They'll happily approve one for an operator whose statements look stable. The right time to apply is when you don't need it.

For a trades business at $1M+ in revenue, a $100K working capital line is the single highest-leverage piece of capital infrastructure you can put in place. Set it up. Forget it's there. Use it the next time payroll is tight.

Option 2: SBA Express. SBA Express is the fast version of an SBA loan - up to $500K, decisions in days instead of weeks, less paperwork.

It still takes longer than an MCA (typically 2 to 4 weeks to fund), but the rate is dramatically lower (11 to 13 percent APR) and the term is much longer (typically 7 to 10 years on working capital, longer on equipment). For an operator who knows they'll have repeating cash crunches over the next few years (seasonal HVAC, project-based GC), an SBA Express line that sits ready is the right answer.

Option 3: Invoice factoring (the legitimate kind). Factoring sells your invoices to a third party at a discount in exchange for cash now.

Done well, factoring costs 1 to 3 percent per month of the invoice value, which is fine for short-term gaps. Done poorly, it costs 5 to 15 percent per month and the factor controls your customer relationships. The good ones are recourse factoring with a single trusted partner. The bad ones are non-recourse with weekly fees, escalators, and customer-direct collections that damage your reputation.

Use factoring when you have a single big slow-paying customer and a known time horizon. Don't use it as a permanent capital structure.

Option 4: Equipment-collateralised line of credit. If you have paid-off equipment (trucks, excavators, generators) sitting on your balance sheet, you can borrow against them.

Banks will lend roughly 60 to 80 percent of the auction value of paid-off equipment, secured against the equipment itself. Rates are typically 9 to 14 percent APR, and the line is revolving - you can draw and repay as needed. This is a great structure for an operator with substantial paid-off equipment but limited cash reserves.

How to set this up before you need it

The single most important sentence in this article: the right time to apply for a working capital line is the day after a strong quarter.

The bank looks at your last 24 months of bank statements and tax returns. They want to see stable revenue, controlled spending, and adequate margins. The week after you finished a strong quarter is the easiest moment in your year to underwrite. The week after a soft quarter or a payroll bounce is the hardest.

Here's the playbook:

Today: pull your last 24 months of bank statements. If revenue has been stable or growing, you can probably qualify for a line equal to 10 to 15 percent of annual revenue.

Apply now, not later. A line you don't draw on costs you nothing. A line you don't have when you need it costs you 90 percent APR.

Match to the right bank. Different banks have different appetites for trades. Some love HVAC. Some hate landscaping. Some only do real estate-collateralised. Frank's panel covers 40+ US banks; we match your profile to the bank that says yes fastest.

Free to you. The bank pays Frank a commission on funded deals. You pay nothing. There's no incentive to push you toward the wrong product.

If you're already in an MCA, the path out is refinancing into a real bank loan. It can be done - we do it all the time. The earlier in the MCA cycle you do it, the cheaper it is. Use the MCA refinance calculator to see what it would cost to refinance. The number is almost always smaller than what you're paying to stay in.