Merchant cash advances
What is a merchant cash advance and what are some of the drawbacks of a merchant cash advance? It has become a common method of small company financing. This approach enables you to fund future sales while also allowing you to be funded fast. As a result, in some cases, an MCA may be a viable alternative. A cash advance allows you to borrow money now against your future earnings. The lender “advances” you the money before you are paid, thus the term. A cash advance differs from a traditional loan in that you are selling your future earnings in return for cash now. Personal cash advance loans are taken out against your next payday, and the lender deducts the amount borrowed plus costs from your bank account. Whilst they are very beneficial, we take a look at some of the drawbacks of a merchant cash advance.
Borrowers are often required to submit a check for the amount of the loan plus costs, which is subsequently cashed once the borrower receives the funds. The rates for these loans are sometimes exorbitant, leaving borrowers with enormous debt. Cash advance loans have a reputation for being exploitative. People without credit cards, on the other hand, might rely on them for essential financial flow. A merchant cash advance loan is a form of cash advance that is provided to merchants and other businesses in need of quick liquidity.
Drawbacks
There are certain drawbacks of a merchant cash advance that you should be aware of. Before applying for financing, consider these drawbacks as well as the potential rewards.
- They are expensive
One of the most significant drawbacks of merchant cash advances is the high cost of the product in comparison to other options. You will typically pay between 9% and 50% more than the amount of your investment, frequently over a short period of time. Merchant cash advance businesses calculate the amount you must return by multiplying the amount of funding by a factor or multiplier. The factor is usually between 1.09 and 1.50. If you borrow $100,000 and the finance firm uses a factor of 1.25, you’ll owe $125,000 ($100,000 x 1.25) over the life of the loan.
- They are only a short-term solution
Another drawbacks of a merchant cash advance is that the cash advances are often for a short period of time, ranging from three to fifteen months. Another factor that contributes to the high cost of cash loans is the short time frame. Due to the short term, only utilize the product if it solves your financial problem and creates enough money to pay back the loan. Using a cash advance elsewhere might be counterproductive.
- They may not solve your problem
One of the most serious issues with merchant cash advances is that they are frequently misused. Although the product is not classified as a term loan, it functions similarly. The line is paid back in regular payments and your firm receives an instant cash injection. Repaying the line in this manner decreases the amount of money available in your account. This final point is critical. Assume you receive a $100,000 MCA with a six-month repayment. Assume the repayment will be made in equal installments, which is not always the case. You’ll have repaid $60,000 by the third month, leaving you with $40,000 in available credit ($100,000 original line – $60,000 in installments = $40,000).
You will have paid $100,000, which was the original amount you were given, by the end of the fifth month, with one more month of payments to go. Some business owners are unprepared for this eventuality. In some situations, the business encounters financial difficulties a few months after receiving the loan advance. Many business owners, however, respond to this circumstance by taking out a second cash advance loan. They utilize the second loan to satisfy the first loan’s payment requirements as well as for some extra cash flow. Frequently, the remedy is just temporary. The firm will soon have several MCAs. Having several MCAs is known as ‘stacking’ and it is financially risky. Many businesses in this circumstance face financial difficulties. They frequently never recover. The only way to solve this situation is to pay off the cash advances, either through a small company debt consolidation program or another method.
- Financing future sales are risky
Finally, a cash advance is based on the concept of selling future sales. Because the future is difficult to foresee, this assumption can be problematic for some firms, putting you in danger of taking out an MCA or an ACH loan only to have your sales decline. This risk, by the way, applies to any loan or financial instrument. Due to the high expenses and short repayment terms, it is a major problem for MCAs and ACH loans.
Regular cash flow and working capital are essential for a successful firm. Every firm has periods when sales are low and cash flow is limited. When this happens, many business owners seek capital from other sources. A merchant cash advance is one kind of finance. This is how merchant cash advances (MCAs) came to be, a type of small company financing that allows businesses to utilize their future credit card earnings immediately. MCAs are commonly utilized by businesses that process a large number of credit card transactions.
To find out more about Merchant cash advances, get in contact with the team at Funding Bay. We work with a roster of lenders who provide merchant cash advances such as Merchant Money, 365 Business Finance, or FIBR.
