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Merchant Cash Advance Relief: Options to Get Out of Costly Business Financing Deals

Running a small business is tough. Cash flow issues happen all the time – your monthly expenses exceed the cash you have on hand due to slow sales or customers falling behind on payments.When you’re strapped for cash, fast financing like merchant cash advances (MCAs) seem tempting. You get an upfront lump sum payment in exchange for a percentage of your future credit card revenue over a short repayment period – usually around 18 months.The money comes quick – often within 24 hours – with minimal paperwork. But MCAs come at an extremely high cost, with annual percentage rates that can exceed 350%.If you took out an MCA and are now struggling under the weight of crippling payments deducted daily from your account, know there are options for relief. Let’s break down how merchant cash advances work, their risky downsides, and alternative small business financing options to get out of debt.

How Do Merchant Cash Advances Work?

Merchant cash advance companies provide a lump sum payment upfront in exchange for a fixed percentage of your future credit card sales.Here are two common MCA repayment methods:

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  • Percentage of daily credit card sales – Called the “holdback rate,” this is usually 10-20% of daily revenue. So if you bring in $1,000 per day, $100-$200 goes toward repaying your advance.
  • Fixed withdrawals from your bank account – Some MCA lenders deduct a set amount from your bank account each week or month rather than taking a percentage of sales.
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In either scenario, payments continue automatically until you pay back the full cash advance amount plus fees, which are based on your “factor rate.”

The True Cost of Merchant Cash Advances

While MCA money comes quick, it comes at an incredibly high price:

  • Factor rates ranging from 1.1 to 1.5 – This rate determines the total amount you’ll repay, inclusive of fees. A factor rate of 1.2 on a $100,000 MCA means you’ll owe $120,000. That’s $20,000 in fees!
  • Extremely high APRs – Annual percentage rates often exceed 350%, much higher than even most credit cards for bad credit. And remember – MCA agreements don’t even disclose APRs like loans. You have to calculate it yourself.
  • Short repayment periods – Most MCA contracts last around 18 months or less. Daily repayments deducted from your account make it hard to cover operating expenses.

Taking out an MCA without understanding the above can trap you in a dangerous debt cycle. And because MCAs are structured as commercial transactions, not loans, there are limited consumer protections in place around misleading marketing tactics and hidden fees.

4 Merchant Cash Advance Relief Options

If you want to break out of the MCA debt trap, here are four options that may help:

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1. Debt consolidation loan

Borrow money at a lower interest rate to pay off your cash advance, then make one monthly payment to your new lender. This simplifies repayment, helps you save on interest, and prevents daily deductions that hurt cash flow.Personal loans for debt consolidation range from 5% to 36% APR on average. Even higher-rate installment loans beat MCA costs.

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2. Business line of credit

Lines of credit provide revolving access to funds – borrow as needed up to your credit limit. Interest rates start lower than MCAs, and you only pay interest on what you use. Lines of credit don’t require daily payments, so they’re less likely to break your budget.

3. Balance transfer credit card

0% intro APR cards allow you to transfer your MCA balance and pay no interest for 12 to 21 months. This buys you time to pay it off without finance charges accruing daily.Make sure to have a payoff plan for before the 0% rate expires. Balance transfer cards typically charge interest around 16% to 27% afterward.

4. Merchant cash advance payoff company

Specialty lenders like Delancey Street offer to buy out your MCA contract so you make affordable payments to them over time instead. This gets the original MCA company out of your bank account.Payoff loans likely charge lower rates than your cash advance did but expect fees for this service. Carefully compare offers to make sure refinancing saves you money over the loan term.

Tips to Avoid Merchant Cash Advance Trouble

Using any of the above relief options starts you down the path of paying off your advance affordably. But don’t jump right back into an MCA after finally getting some breathing room!Here are tips to avoid needing another cash infusion:

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  • Wait for financing offers in the mail – Banks and online lenders regularly send business loan offers to small business owners. Say yes to one with reasonable rates and terms when possible.
  • Build up emergency savings – Slowly build at least 3 to 6 months’ worth of operating expenses in a separate emergency fund. This protects you during seasonal dips in revenue.
  • Only borrow what you need – Don’t take the maximum MCA amount available if possible. Consider what you can realistically afford to pay back on your usual sales volume.
  • Pay off debts aggressively – Make an extra principal payment whenever possible to pay off loans early and save on interest. Maintain on-time payments for all financing.
  • Improve your credit – Aim for a credit score over 680 to qualify for affordable financing options beyond MCAs.
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Following financial best practices helps ensure you can access business financing that grows your company over the long-term – not buries it further in debt.At Delancey Street, our dedicated experts can review your current situation to find the most affordable payoff or refinancing option for your budget. Get in touch for a free consultation and take the first step toward merchant cash advance relief today.

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Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

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