The type of alternative business financing known as a merchant cash advance has been around for a while now. However, recently it has seen a large uptick in popularity, simply due to the fact that almost all other forms of small business financing have been severely restricted, or have disappeared completely.
These “cash advances” are marketed quite aggressively by some companies, and unsuspecting business owners in a bind may fall victim to a sales pitch. The advantages to these loans are truly attractive, especially to a business that is in need.
Most businesses can get the money within a short time frame, usually less than a month, and the amount of documentation needed is fairly low compared to a conventional SBA-backed loan that may run as long as 180 pages or more. Often cash advance companies can also work with bad business credit that many firms find themselves in as the recession drags on. However, business owners need to be aware of some of the less appealing aspects of some merchant cash advances.
1. Variable Rates – merchant cash advances are not technically loans, and therefore, are not subject to usury laws and other regulations that govern interest rates. As such, merchant cash advance providers may opt to change the interest rate during the repayment period depending on a number of factors. This can make a huge difference in the daily payment a merchant is making.
2. Daily Payment Percentage- Almost all merchant cash advances are collected daily and are designed as short term loans, often 6-12 mos in duration. Collecting the payment daily is the only way to pay the loan back in such a short time frame. However the problem lies in the percentage that a merchant cash advance takes a part of each daily sales gross. Sometimes these “holdback” percentages can range as high as 40%, depending on a number of factors. If a business is already in trouble, this can be a final, crippling blow.
3. Fees- Advances can carry not only huge upfront fees, but also high fees at the time of funding. An example would be a small cash advance of say $5100.00. The actual net amount the business would receive may be around $3800. Fees amounting to over 20% of the loan amount are not unheard of. Additionally, the interest rates on such loans may be as high as 50% and require a merchant to switch credit card processors prior to receiving funds.
In conclusion, there are certainly cases where a merchant cash advance has helped a business in need. The problem lies in that many of these types of advances can easily end up solving a short term financial need in exchange for a bigger, long term business loss. Fortunately, there are new, lower cost alternatives that still offer quick, low doc funding with no upfront fees and rates that are much lower. To find out more, click here.
Neal Coxworth is an entrepreneur and a 17 year veteran of the consumer credit industry with experience in originating, underwriting and processing mortgage, student and consumer credit loans.