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5 Reasons Small retailers should use MCAs with caution

Retailers continue to send MCA applications amid the increase in the potential dangers of using Merchant cash advances as an aid to get through cash flow crises or obtain extra finances for any other reason.

So what are the red flags a micro-business owner should watch out for when in search of MCAs?

1-You could end up with a triple-digit APR

Some of the merchant cash advance offers in the market have triple-digit annual percentage rates. It is the total cost of borrowing per year plus all related fees and interest, typically ranging from 40% to 350% but varies depending on the amount of advance you seek, your lender and additional costs.

Mathematically, this is far costlier than traditional micro-business loans with APRs of 10% or less.

2-There’s no advantage to an early settlement

Because retailers must repay a preset amount of fees regardless of how fast they pay back, they get no interest savings by making early repayments. This is not the case with traditional micro-business loans, where paying back earlier may save you a few bucks— because you get to pay lesser in interest. The other implication is that; if you choose to refinance, you still pay in full the predetermined fees, and you risk suffering a penalty for early settlement.

3-They lack federal supervision

No federal agency oversees the goings-on of the merchant cash advance industry. MCAs are not part of federal regulations because they entered the market as commercial transactions, and not business loans. As a result, it is the Uniform Commercial Code in every state (and not banking laws) that governs their use.

4-More monthly sales could mean a higher APR

As with MCAs paid off by surrendering an agreed percentage of your per-day credit card sales, the APR not only depends on the total fees to be repaid but also on how quickly you work to clear your loan. As a result, you may suffer more with an MCA during slow seasons because that would mean payments extend over a longer period causing your APR to drop. On the other hand, if sales are at peak, MCA repayment is much faster, and your APR is bound to rise.

5-MCAs may be the start of a continuous debt-cycle

The fact that cash advances are relatively cheaper and easier to get may lead retailers to an endless debt cycle, more so merchants that do not qualify for other forms of commercial funding. Micro-business owners often find themselves in need of another MCA soon after using up their first one because of the exorbitant costs and addiction to MCAs, which may lead to cash flow crises.

In a nutshell,

Be careful to watch out for the above warning signs when reading through your MCA contract.