Think of a merchant cash advance as a payday loan. You sell off a portion of your future revenue to a merchant, who receives its payment back through direct deposits at the end of every month. This may sound good on paper — selling future profits to deal with the problem now — but we are about to show you that there are many hidden problems with merchant cash advances that you may not have been aware of.
5 Things Wrong with Merchant Cash Advances
Conceptually Incongruous – If you are an average person, and you are looking for a cash advance, you show your previous pay stubs to be qualified. You then pay a small interest rate when you pay back that loan. On the small scale, all of the factors involved are very manageable. The person will most likely earn within 5-10% of that paycheck the next week. However, when you apply this to a business, it does not always hold true. There may be a trend of incoming payments, but you cannot reliably expect the exact trend to continue week-to-week for most businesses. The stability of the employer is what makes payday loans reliable, but when the stability of the business relies on a fluctuating market, it creates an incongruous comparison.
Higher Interest Rate – With a merchant cash advance (MCA) you are not receiving your money up front, and the stability of the market is not guaranteed. When you pay back your MCA, you are paying back a percentage (typically 5-25%) of your profits for the next few months, but since there is no collateral and you are merely paying a percentage of your profits, it can be difficult to track how much is being paid back. Often MCAs come with anywhere from 10% to 25% interest rates. Over time, the MCAs end up being far more expensive than they were worth.
Consistent payment – Despite how well or poorly your business does, the percentage doesn’t change. You will always be paying anywhere from 5-25%. If your sales spike, that percentage remains, and that can severely diminish the well-being of the business itself.
No Collateral – While having no collateral can seem like a good thing, it is actually a bad thing. When you have collateral to leverage, there is something at risk, because the loan has something to rebound off of. With cash advances, the only thing to bounce off of is your business itself. The security of collateral makes financiers feel safe. When financiers don’t have collateral, they find their safety elsewhere, which is why the interest rate is so high.
Last Option is not the Best Option – Finally, it’s just an unhealthy situation to be in. Most people don’t consider merchant cash advances unless they think that there are no other options available. When you think that there are no other options left, don’t pick something just because you think you have no alternatives. Merchant cash advances can charge as much as they do and perform the practices they offer because small business owners find themselves in unfavorable situations. It’s better to consider alternative options such as refinancing or if possible, factoring .
The best way to finance your small business is through factoring, and the best way to receive factoring is through AmeriFactors. Factoring is when you sell your accounts receivable for immediate payment for a small cost. It’s one of the fastest and most secure ways to obtain the capital need to maintain and grow your business. If you would like to explore the world of factoring, give us a call at (800) 884-3863, we would love to talk to you about your business.