Navigating Merchant Cash Advances in Alaska: A Guide for Small Businesses
Merchant cash advances have become popular for small businesses in Alaska needing quick financing. But merchant cash advances (MCAs) come with risks that business owners should understand before signing up. This article provides tips on avoiding legal issues with merchant cash advances in Alaska.
What is a Merchant Cash Advance?
A merchant cash advance provides a lump sum of capital to a business in exchange for a percentage of future credit card or debit card sales. It‘s not technically a loan, but rather a purchase of the business‘s future receivables.
-Here’s how it works:
- A financing company provides an upfront cash sum to the business, usually $5,000 – $500,000.
- In exchange, the business agrees to repay by allowing the financer to collect a fixed percentage of its daily card sales until the balance is repaid plus fees and interest.
- The financer makes daily or weekly withdrawals from the business’s bank account to collect the agreed upon percentage. This continues until the advance is fully paid off, typically 3-18 months.
- There’s no set repayment schedule. The business simply repays a fluctuating amount each day based on its card sales until the balance reaches zero.
Pros and Cons of Merchant Cash Advances
MCAs appeal to businesses because they provide quick capital without requiring perfect credit. However, there are downsides to consider:
Pros:
- Fast approval and funding
- No collateral required
- Alternative financing for bad credit
- Payments tied to sales, so more flexibility
Cons:
- Very high interest rates and fees
- Daily repayments can stress cash flow
- No payment limits or term length
- Balance can end up costing 2-3X the original advance
The cost of an MCA is extremely high compared to conventional financing. Rates typically range from 30-60% APR when fees are factored in. The longer it takes to repay, the more expensive it gets.
Common Legal Issues with Merchant Cash Advances in Alaska
While MCAs provide quick capital access, they also come with potential legal issues Alaska businesses should know:
- Deceptive practices: MCA providers may hide true costs through misleading marketing and contract terms.
- Lack of regulation: MCAs aren’t subject to the same consumer protections as loans, allowing predatory lending.
- Confusing repayment terms: Some business owners don’t realize there’s no set payoff date.
- Processor issues: Changing processors can disrupt repayment, causing contract breaches.
- Aggressive collections: Struggling businesses may face tactics like bank account access or lawsuits.
- Credit damage: Defaulting can hurt your credit and financing ability.
How an Alaska MCA Attorney Can Help
A knowledgeable Alaska attorney can help businesses avoid issues with merchant cash advances. An attorney can:
- Explain MCA contract terms, rates, conditions, and risks
- Negotiate more favorable repayment terms
- Ensure compliance when changing card processors
- Resolve collections disputes and contract breaches
- Defend against MCA-related lawsuits
- Advise on debt restructuring or bankruptcy if struggling to repay
- Help repair credit damage from defaults
It’s crucial to consult an attorney before signing an MCA to fully understand the commitment. Don’t just trust the MCA salesperson.