Merchant Cash Advances: What Business Owners Need to Know

Are you a small business owner struggling with cash flow issues? Have traditional bank loans left you feeling frustrated and discouraged? If so, you may have considered a merchant cash advance as a potential financing option. At Delancey Street, we understand the challenges that entrepreneurs face when it comes to accessing capital. Our experienced attorneys are here to guide you through the complex world of merchant cash advances and help protect your interests.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is NOT a loan. Instead, it’s an advance on your future credit card sales. Here‘s how it typically works:

1. A merchant cash advance provider gives you a lump sum of cash upfront.
2. In exchange, you agree to repay the advance plus fees by allowing the provider to take a percentage of your daily credit card sales.
3. This continues until the full amount is repaid.

Sounds simple enough, right? Well, not so fast. While MCAs can provide quick access to capital, they often come with SIGNIFICANT risks and costs that many business owners don’t fully understand.Let’s break down some of the key features of merchant cash advances:

As you can see, MCAs offer some potential advantages like fast funding and flexible credit requirements. But there’s a LOT more you need to know before signing on the dotted line.

The REAL Cost of Merchant Cash Advances

Here’s where things get tricky. Merchant cash advance providers don‘t charge interest in the traditional sense. Instead, they use something called a “factor rate.” This can make it EXTREMELY difficult to compare the true cost of an MCA to other financing options.Let’s look at an example:Say you receive a $100,000 merchant cash advance with a factor rate of 1.4. This means you‘ll need to repay $140,000 in total ($100,000 x 1.4). If you repay this over 12 months, the effective annual percentage rate (APR) could be well over 80%!Compare that to a traditional bank loan with a 10% interest rate, and you can see why MCAs are often criticized for their high costs.But wait, there’s more! Many MCA agreements include hidden fees and charges that can drive up the cost even further. These might include:

• Origination fees
• Administrative fees
• ACH fees
• Early repayment penalties

At Delancey Street, we‘ve seen far too many business owners get in over their heads with merchant cash advances. That’s why it‘s CRUCIAL to have an experienced attorney review any MCA agreement before you sign.

The Risks of Merchant Cash Advances

Beyond the high costs, merchant cash advances come with several other potential risks that business owners need to be aware of:

1. Daily Repayments Can Strain Cash Flow

Unlike traditional loans with monthly payments, MCAs typically require daily or weekly repayments. This can put a serious strain on your cash flow, especially during slow periods. We’ve seen businesses struggle to make payroll or pay other essential expenses because of aggressive MCA repayment schedules.

2. Personal Guarantee Requirements

Many MCA providers require a personal guarantee from the business owner. This means you could be personally on the hook if your business can‘t repay the advance. Your personal assets, like your home or savings, could be at risk.

3. Stacking and the Debt Spiral

Some desperate business owners take out multiple MCAs to cover existing obligations. This practice, known as “stacking,” can quickly lead to a debt spiral that’s nearly impossible to escape. We’ve helped clients who found themselves juggling 5 or more MCAs, each with daily repayments!

4. Potential for Predatory Practices

The merchant cash advance industry is largely unregulated. This has led to some providers engaging in predatory practices, such as:

• Misleading marketing tactics
• Pressure to sign agreements without proper review
• Aggressive collection practices
• Unfair contract terms

Alternatives to Merchant Cash Advances

Before jumping into an MCA, it’s important to explore other financing options that may be available to your business. Some potential alternatives include:

1. SBA Loans: While they can be harder to qualify for, SBA loans offer much lower interest rates and longer repayment terms.
2. Business Lines of Credit: These provide flexible access to capital as needed, often with lower costs than MCAs.
3. Invoice Factoring: If you have outstanding invoices, factoring can provide quick cash without the high costs of an MCA.
4. Equipment Financing: For businesses needing to purchase equipment, this can be a more affordable option than an MCA.
5. Peer-to-Peer Lending: Online platforms connect businesses with individual lenders, often at competitive rates.

Remember, every business is unique. What works for one may not be the best choice for another. That‘s why it’s so important to consult with an experienced attorney who can help you evaluate ALL your options.

How Delancey Street Can Help

At Delancey Street, we’ve seen firsthand the devastating impact that predatory merchant cash advances can have on small businesses. Our team of skilled attorneys is dedicated to protecting entrepreneurs and helping them make informed financial decisions.Here’s how we can assist you:

1. Contract Review and Negotiation

Before you sign ANY merchant cash advance agreement, let us review it. We’ll identify potential pitfalls, explain the true costs, and negotiate better terms on your behalf. Our goal is to ensure you fully understand what you’re agreeing to and to protect your interests.

2. Debt Restructuring and Consolidation

If you’re already struggling with one or more MCAs, we can help. Our attorneys have extensive experience negotiating with MCA providers to restructure debt, lower payments, and find more manageable repayment terms. We’ll work tirelessly to help you get your business back on solid financial footing.

3. Legal Defense Against Predatory Practices

Have you been the victim of unfair or deceptive practices by an MCA provider? We’ll fight aggressively to protect your rights. Whether it’s defending against a lawsuit or pursuing legal action against a predatory lender, we have the skills and experience to advocate for you.

4. Strategic Business Advice

Beyond just dealing with MCAs, our attorneys can provide comprehensive legal and strategic advice for your business. We‘ll help you explore ALL your financing options and develop a plan for sustainable growth.Don’t let a merchant cash advance put your business at risk.