Sometimes following trends may incur you avoidable expenses. For example; the sudden increase in the number of companies applying (and qualifying) for merchant cash advances may push you into making rush borrowing decisions you might later regret. These quick cash options are known to cost merchants dearly if not well scrutinized during selection.
Merchant Cash Advances, for instance, carry triple-digit annual percentage rates (APRs) — which is the gross cost of a loan, plus all fees. These added charges along with the daily repayment schedule often affect cash flow. And in worst cases, you may end up in a debt cycle where you find it nearly impossible to pay back and have to refinance into another MCA or be declared bankrupt.
It’s no surprise nonprofit lenders & consumer advocates consider cash advances the very last resort. Here are the merits and demerits of merchant cash advances to guide you into making a smart financing choice.
Until recently, MCAs have been serving businesses that primarily earn their revenue from credit & debit card sales. Lately, cash advances are accessible to all other business that doesn’t depend heavily on credit and debit card sales. MCA providers sell their funding product as unique and not a loan. Typically, MCA funders offer merchants agreed-upon upfront cash in trade for your micro-business’ future sales.
MCA Repayment Structures
Merchant cash advances can be repaid in two ways. One method is you get a merchant cash advance for a portion of your pending credit/debit card sales and pay back by allowing pre-determined daily or weekly remits from your account, famous as ACH MCAs.
The fee charges are determined by how quick you can settle the cash advance. The vendor works out a factor rate based on risk assessment— usually anything between 1.2 and 1.5. A higher factor rate means you pay higher fees. The product of the amount advanced and the factor rate is the full amount you’re expected to repay.
When to Get a Merchant Cash Advance
You’re avoiding loans on your FICO report – MCAs are perfect for merchants struggling to fix their credit or those looking make big purchases like homes or cars. This type of funding doesn’t appear on credit reports.
Your business is seasonal –repayment terms for MCAs work well for seasonal businesses. You repay less when making less revenue and more during high season unlike loans with fixed plans.
Your business is online – Web-based companies that conduct much of their sales online are major merchant cash advance candidates. Unless you take payments in the form of checks or cash, you should go for an MCA.
The bottom line
Every MCA provider has different pricing plans and repayment models which are the main factors one needs to look into when picking a funder. Therefore you’ll make the extra effort of comparing the available choices.