Merchant Cash Advances: Quick Funding That Could Be Risky

Recent statistics conquer that most financing deals considered a temporary solution to get micro- businesses through cash flow crises often come with sky-high interest rates and related fees.

A few years ago, retailers submitted Merchant Cash Advance applications would enjoy a lump sum in trade for a percentage of their upcoming credit/debit card sales. But experts say these days paying MCAs back is as painful as going through per-day or per-week debits from their bank accounts.

While it would be iniquitous to fail to acknowledge how much cash advances have held down the fort for business, more so the “high-risk”, it is advisable to weigh their risks and costs of the deal your financial provider offers you.

You want to use short-term funding selectively because they have annual interest rates that range from 60% to triple digits, to cover for their short-term method of the financing. Merchant Cash Advances, in particular, have “factor rates” ranging from 1.15 to 1.5.

Mathematically, the total cost of an advance is the product of the amount being owed and the factor rate. And depending on where you borrow, there could be other fees as well.

Small business love MCAs because they are not like traditional loans; no collateral or personal guarantees needed, and you get ASAP funding— within 48 hours. But over the years MCAs have evolved and become accessible even to micro-businesses that do not take credit card. And in these cases, settlement occurs through per-day or per-week debits from their bank accounts.

According to Jeffrey Wurst, a senior advocate at Ruskin Moscou Faltischek, this method of repayment has “abusive terms.”

Wurst advised retailers to shop around if they are offered terms seem too exorbitant adding that MCAs firms that charge rip-off rates have tainted the reputation of MCAs.

Leslie H. Tayne of Tayne Law Group also said retailers must keep in mind that “a high-interest rate means your income is significantly reduced until you’ve paid off the financing and the per-day repayment method puts a massive amount of stress on a firm’s cash flow.”

Tayne says though merchants use MCAs as a substitute solution as they wait for major funding from elsewhere, sometimes the anticipated finances fail to arrive, and they still have to make the repayment which puts the retailer at the risk of defaulting a payment.

These Risk Factors makes MCA a more expensive financing than traditional loans. “The cost of funding is high if the borrower’s risk profile is high,” says Mr. Nathan Abadi CEO Excel Capital Management.

“Default rates on merchant cash advances have shot to 80% in contrast to the 2% on traditional financing,” he says

Final Words,

Sift through the costs and risks carefully before putting pen on paper. You don’t want to sign a deal that may be open doors to more debts.

Author Bio: As an account executive, Michael Hollis has funded millions by using merchant cash advances. His experience and extensive knowledge of the industry has made him an expert at First American Merchant.