As a small business owner, you may be looking for some capital from merchant cash advances. It can be hard to maintain the funds you must have, so sometimes it’s worth considering alternative loans. Here’s what you need to know about merchant cash advances before taking one:
First, let’s take a look at how merchant cash advances work.
This type of funding consists of a merchant cash advance provider giving you an upfront loan in exchange for a portion of your future sales. You will either repay this through future credit and debit card sales or through daily or weekly debits from your bank account. The latter option is the more common one.
The catch here is the risk factor rate that is added on to your balance which could involve high fees. According to Nerdwallet.com, an example could be as high as $20,000 worth of fees on a $50,000 loan. This takes into account how fast you will pay it back and what your risk factor is. Sometimes owners pay a daily rate, sometimes a weekly rate. It differs from the monthly payment of a credit card or other loan.
Advantages of Merchant Cash Advances
Though the fees can be quite high with an MCA, there are some advantages:
- They are quick. Because providers look at a business’s daily credit card receipts, they are quick, and often you can get an MCA within a week.
- No collateral is needed. These loans are unsecured, so if your business really fails, you don’t lose your assets. However, it can affect your business credit score if collection agencies need to be called in.
- If your sales are low, your payments will be low, too. Because this is often a daily or weekly payment, and not a fixed one, payments are relative to your daily credit and debit card intake.
Disadvantages of Merchant Cash Advances
While there are advantages to MCAs, there are also some drawbacks:
- Your APR can be very high, with a lot of factors determining it. The overall cost of these loans is higher than a traditional loan, often in the triple digits.
- Oddly, the more you are making, the higher your APR will be. This is where it can get confusing; the faster you repay, sometimes the higher the fees are. Therefore, there isn’t really a benefit to paying it off early.
- It’s hard to compare an MCA to other types of loans because they can be quite confusing. Learn as much as you can before committing.
Even for those businesses with poor business credit scores, there is a way to get a loan. A merchant cash advance may be for you, but it may not. Check all of your options to find the best one for you for now, and the long run.