Is a Merchant Cash Advance Right For Your Business?

It used to be that a merchant cash advance was only for businesses that did the majority of their sales with debit or credit cards. Now merchant cash advances are open to many different types of businesses. If you’re looking for quick cash to meet payroll or other expenses this type of financing may be one to consider. There are several important pros and cons, laid out below.

The Pros

While an MCA shouldn’t be your first choice for financing, if you find yourself in a fix, it can provide cash quickly and easily. The application process isn’t extensive and approval and funding can be completed within a week. 

There are two main ways that an MCA is structured. Your business is issued a loan which is repaid through a percentage of your future sales or by fixed daily or weekly repayments. Because it is based on your future income, there’s no collateral required for these loans. 

Finally, if you choose to repay through a percentage of future sales, your repayments will adjust as your business does, meaning you’re never on the hook for more than you can repay when your business is slow. 

The Cons

Those very attractive pros and balanced by some pretty heavy cons. A merchant cash advance has some of the same drawbacks as payday loans. The interest charged for the convenience can trap a business in a cycle requiring a new advance as soon as the old one is completed.

If you repay through credit card sales you are actually penalized for your success because you end up paying a higher APR. That’s because your repayment is fixed up front and there’s no benefit in repaying faster. For example, if you borrow $100,000, you may have a repayment of $150,000, a factor of 1.5. If you pay off the loan through credit sales in six months, your APR was 100% but if you pay it off in a year, your APR drops to 50%.

If those interest rates seem extreme, they are completely within the norm of MCA lending which can have rates over 300%. The example above shows that you are still paying back the same amount of cash, so yo may wonder what difference it makes. The fact is that traditional loans, even business credit cards may be a better option if you are strapped for cash.

If you do decide to go with an MCA, it’s imperative that you find a trustworthy lender, set up the repayment option that best fits your business and read the fine print.  

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