Merchant cash advances are quick and easy to obtain, but what most businesses don’t know is that this just adds to the financial stress that small business owners are already under. The high-interest rates, rolling loan terms, expensive penalties and difficulty of repayment make it almost impossible for a merchant cash advance to be paid off without difficulty.
Merchant cash advances are quick and easy
Merchant cash advances (MCAs) are a growing trend among small business owners. It is a term used to describe short-term business loans that can be secured by a company’s accounts receivables or inventory. Simply put, it is a money advance against your invoices – no asset needed.
The application process for MCA is quick and easy, which makes it ideal for small businesses when they need immediate cash flow or when their finances are not in order. You can get the money you need within 24-48 hours if approved. These loans are paid back in installments over a set period of time.
Because merchant cash advances are based on sales volume rather than creditworthiness, it's easy for businesses in need of working capital to obtain funding quickly.
Merchant cash advances can put a business on an unsustainable debt track
Merchant cash advances are a highly controversial financial product for small businesses. They can be extremely helpful when used correctly, but they can also put a small business on an unsustainable debt track.
The fees and interest rates on Merchant Cash Advances can be as high as 30% or more, depending on how much you borrow and where you get the loan from. The fees will vary based on how long you keep the loan for, but it is typically for one year or less. Merchant cash advances are often repaid as a fixed percentage of daily sales or within a certain period of time. Businesses may find themselves in a cycle of debt from which it's hard to escape.
Merchant cash advances create debt as well as high risk for default
"We got into a slow season, and I thought it wouldn't hurt to take out a loan to keep us afloat while one thing led to another. And now over 60 months, I have 5 major loans, two were supposed to be for consolidation, and it just kept packing more and more and more money onto the tab. Now I'm sitting at $160,000 worth of debt between loans, credit cards and debt."
Merchant Cash Advances are a quick and easy way to get the money you need to run your business, but they're not a long-term solution.
While businesses might take these loans out because of a short-term cash crisis, they often end up having to use them for longer than they anticipated. Merchant Cash Advances are detrimental to businesses who are using them for expenses. The problem arises when one is looking at lower revenue and trying to use this to bridge the revenue gap.
"I just can't afford the amount of money that's being taken out automatically daily, weekly and monthly."
When you're a business owner, particularly a small business owner, it's easy to overlook the impact of debt on your company. Most owners are so focused on running their company and putting out fires that they don't take the time to sit down and do the math on how much a new loan or line of credit will cost them.
Consider this, if you had $50 taken out of your pocket every single business day BEFORE you get your pants on in the morning, what type of impact would that have on you on a monthly basis? Let's do the math. There are 21 business days in a month. So 21 x $50, that is $1050. For most of America tacking on an additional $1050 a month is pretty significant.
If you think about it as a business, the impact that a daily, let alone a weekly or monthly payment is going to have, it's going to be astronomical considering how aggressive that is to pay back any debt.
For businesses experiencing the downside of having mca debt, they should speak to someone who is
Experienced
Willing to listen to their situation
Going to evaluate where the business is
in order to put together the best plan of action.
Too often business owners are contacted by companies who simply ask "What can you afford", and then enroll them into a program and start taking payments.
The focus is not as much on what the impact will be on the business or if it is the best-case scenario. They are more concerned with driving revenue, and that is not good. Business owners should work with a consultant, not a salesperson. A consultant will provide insight on the industry, but also the pros and cons of how this is going to impact your current business operations and future goals.
Merchant cash advances are touted as a great way to get short-term working capital and they can be, but the potential pitfalls (of which there are many) aren’t always spelled out or made visible. Working with Callee Debt Solutions, who knows this industry, can be a big help in mitigating risk and negotiating repayment options that may not seem available at first sight.
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