Instant cash, even for businesses with bad credit? Bad credit can be a deal-breaker, but the appeal of getting cash quickly sometimes overpowers. Those in need could look into the merchant cash advance (MCA). But there are heavy drawbacks to the option.
Every business owner needs operating money at one point or another, but finding the easiest way out isn’t always the smartest way out. MCA’s always cost more than traditional business loans.
This article details both the risks associated with a merchant cash advance and the alternatives to choose instead.
MCAs give businesses operating cash upfront, then the owner pays it back by letting the company take a cut of their future sales. The government does not regulate MCA’s. They are very risky.
When an owner has a cash shortage, they are willing to take whatever offer it takes to get them fixed. Some lenders may prey on desperate business owners. Make sure to be careful.
An MCA is not a long term solution. It will cost your business more over time. There are many different options for funding, including accounts receivable financing. An MCA should be a last resort.
Steep APRs
The cost of fees and steep APRs can make the quick out of an MCA a tough pill to swallow.
Most MCAs are repaid daily or monthly from your future sales. The more you earn, the higher the APR. Merchant Cash Advances have APR’s sometimes above 300%. You may end up paying a lot more for the same amount of cash if you opt for a merchant cash advance.
In one case, a business owner used an MCA to get almost $24,000 in cash. They ended up paying back $500 per day for the next 76 days, for a total of $37,500. That works out to about 346% in interest charges.
Compare that to the average small business loan at 8-20% interest for traditional loans. This is much cheaper for you.
MCAs Often Turn Out Worse than the Problem
Sometimes cash is tight and you’re willing to take what you can get to get out. But, for the long haul it’s a bad idea. It can cost a fortune over time. Those high interest fees may put you deeper in debt.
Some borrowers who can’t repay their advances end up taking out new MCAs to pay off the old ones. It’s very risky, and the interest rates are absurd. Without a strong enough cash flow, the debt overwhelms you.
If you can’t make the payments, they can sue you for breach of contract. Some businesses go deeper in debt. At worst, some people file for bankruptcy.
Merchant Cash Advances do not help you build credit. Running credit checks can lower your credit score.
Unlike other loans and financing, MCAs have no government regulation whatsoever. It’s often pitched as something that’s great for the borrower, but in reality the lender comes out on top.
Some business owners get blindsided by an MCA contract that they don’t quite understand. The owner ends up getting stuck with high rates and hidden fees. Pay attention to the fine print!
Watch out for double-dipping when refinancing. That’s when the lender uses the new advance to pay off the old one. It ends up as paying double the interest, since the interest compounds.
Owners who can’t pay back their cash advance tend to fall behind on payments and may go in default, at which point it becomes difficult or impossible to refinance.
The cycle of constantly taking on advances and repaying them strains the business’s cash flow. Paying a couple hundred dollars a day to the lender gets expensive, and then daily operations may start to suffer.
If you needed an MCA for an emergency, the payments might end up taking a bite out of your other bills. You may have to double-dip, or default and risk bankruptcy. The money you borrow to get out of trouble can land you in worse trouble.
Still, it’s not always the case that an emergency pops up, but when it does a MCA can help. If nothing else will help a cash-strapped business get cash immediately, an MCA may be the only option.
Alternatives to MCAs
Whether you need cash now or for the future, alternatives to MCAs exist with fewer risks.
A short term small business loan offers owners a much more affordable alternative. Repayment terms are usually clearer and more predictable than they are with an MCA, and you get a fixed monthly payment.
Like a credit card, a small business line of credit offers an owner the chance to borrow from a set limit. The amount is repaid over time as the owner chooses, unlike the daily or monthly payments due with an MCA.
A bank loan is the most traditional loan option, and the most ideal for small businesses. Small business bank loans have very high approval requirements, and not every business will qualify.
In the end, a merchant cash advance can help a business in need of an immediate solution get operating cash in the door. It can work out okay for business owners, but only if they can actually make the payments. Other funding is almost always better.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
