Sometimes, small business owners need a little bit of help with cash flow, and a merchant cash advance or MCA seems like a good solution. However, there are a few things you might want to know about this solution before diving in.
MCAs have annual percentage rates in the triple digits. This can have a notable impact on your cash flow. As such, many lenders consider this a last resort option. In this article, we’ll explain more about what a merchant cash advance is as well as the advantages and disadvantages that come with it.
What is a Merchant Cash Advance?
This is an alternative to the traditional ways of funding. Providers of MCAs claim that this is not actually a loan. They are advancing you cash in exchange for a piece of future sales.
Repayments for MCAs can be structured in one of two ways:
You get an advance in exchange for part of your future credit/debit card sales
You get an advance and pay it back with daily or weekly debits from your bank account
In addition to paying back the amount you were advanced, you’ll have to pay a fee ranging from 1.2 to 1.5 percent, based on how much of a risk you are. The higher risk you are, the higher your rate will be.
Advantages to a Merchant Cash Advance
Though they should be considered a last resort option for financing, merchant cash advances do have some advantages:
Quick
No physical collateral required
If sales are down, you may be able to make arrangements to lower your payment
Disadvantages of a Merchant Cash Advance
However, even with these advantages, MCAs are not a perfect alternative. There are a few disadvantages as well.
APR likely to be in triple digits
Higher sales equal higher APR
No benefit of early repayment
Not subject to federal regulations
Credit score may be pulled
Contracts are confusing
You may get into a never-ending debt-cycle
Bottom Line
If you are a small business owner in need of some working capital, contact Sterling Capital Consulting for more information on whether an MCA is the best option for you at this time in your business.