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You own your own company, a small or medium business that enriches your community, allows you to explore your passion. At the same time, this also turns in a nice profit. Properly dealing with working capital over time is one of the biggest challenges of running a business. Regardless if it is to buy more equipment, meeting weekly payroll, expand your inventory, or upgrade your technology. You need capital quickly, but do not have the credit or the ability for a traditional bank loan.

merchant cash advance effectiveness

The Effectiveness of Merchant Cash Advance

With the alternative lending choices today, you have several options to receive cash quickly, low rates, and without hassle. The question becomes, which lending option should you choose? One popular method is the merchant cash advance (MCA). However, is this truly the best option for your business?

What is a Merchant Cash Advance?

A merchant cash advance is a form of alternative lending. Many companies, especially those that usually don’t receive loan approval, use this option. These companies do not receive funding from normal institutes. This is because they do not have enough credit history, they have bad credit, or they need the loan fast. Alternative lending providers overlook a company’s credit history and other details in exchange for a higher interest rate, also, through different financing methods. While different alternative lending methods can be of immense help to a company, the type is known as a merchant cash advance that can produce long-term trouble for a company. As well as its employees if used repeatedly or over a long time frame.

How Does It Work?

A merchant cash advance company loans out money to your business in return for a daily portion of your company’s credit card receipts or an automatic daily deduction from your bank account. When your company agrees to this, you must agree to a contract, “explaining” the terms and the factor rate. Unfortunately, these contracts tend to be infused with vague clauses and broad statements. Precisely because these types of lenders and companies are not legally bound to follow the laws that regulate other lenders. As a result, this often leaves your company at a severe disadvantage.

What is a Factor Rate?

The factor rate is the interest rate for a merchant cash advance. Most factor rates for a merchant cash advance tend to be 1.14-1.48. This is a fairly low looking number that could easily mislead any business owner. However, when these factor rates are computed into the more common APR rates, these small numbers suddenly range from a staggering 60-200% APR. When compared to the APR for most loans, 12-24%, the difference is horrifying. This occurs because the federal laws limiting interest rates do not bind merchant cash advances. As a result, this allows the lending company to have free reign over their hidden rates.

How can Merchant Cash Advances Affect YOUR Company?

There are very few prerequisites to sign the contract to receive a merchant cash advance. Here are things that your company needs to ensure your business does not go bankrupt from these risky loans:

  • Credit Card Sales

    Since most merchant cash advances take at least 10-20% of each credit card transaction, it is essential that your customer’s payments are primarily through credit cards. For example, if most of your customers pay by cash or check, as can be the case with most small businesses, your credit card sales will not be enough to pay back the merchant cash advance company within the specified amount of time. Usually, less than a year. This can lead them to either increase the amount taken from each credit card transaction or draw a fixed amount from your account daily.

  • High Volume of Sales

    Let’s say your business deals mainly with credit card transactions. The question then becomes, “Does your company have many sales necessary to turn a profit, despite the large portion of your sales never reaching your pockets?”

    Since merchant cash advances are repaid directly from the processor, your business will never receive the full amount of the credit card transaction. Your business will need to increase sales exponentially to account for this loss. In addition, there is a need to turn the product faster to maintain your normal profit.

The Harsh and Hidden Reality of Merchant Cash Advances

When your business signs the ambiguous contract with this type of lending company, you abandon your flexibility to choose any other type of loan or different merchant service providers. In accepting the astronomical interest and APR rates provided by these lenders, you also agree to the evaporation of your daily cash flow as most of your sales are taken before they even reach your fingertips. This trouble for a cash advance might be worth it if you could build credit through the process.

Unfortunately, receiving cash in this form does not build business credit for the future. This is because merchant service providers are not held up to the same standards and scrutinized under the same laws as other lending services. While the fast cash and a quick contract may seem like a good business opportunity and appealing loan option, the high-interest rates, unregulated business practices, lack of daily cash flow, and severe consequences in the event you cannot pay back the loan in time, could be the end of your new small business.

Have questions regarding MCAs and alternative funding that can better help your business? Call (888) 400-5930 or use the fast, safe & secure online funding application.

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