Merchant Cash Advances, they sound good…but beware, they are dangerous.
So many businesses are in need of cash and because of poor credit issues cannot get the support they require from their bank, thus they are easy prey for various non traditional sources for new capital.
One easy source that more and more businesses are accessing every day is the Merchant Cash Advance,(MCA). Based solely on the revenues generated from business credit card machines, it works like this.
Depending upon the dollar volume of your credit card business, the lender ( not really a lender because its not really a loan but probably better described as accounts receivable financing), simply advances an amount of capital, usually less then $150,000., to a business and is paid back out of the revenues the credit card machine generates, automatically.
The “fee” is approximately 25% of the advance, but when actually calculated as if it were “interest” on the “loan” it can amount to hundreds of percent, even as high as 400-500% annualized. This is completely unregulated because it is not technically a loan.
MCA’s are compelling because of the following few reasons:
1. It is quick and easy, little paper work and no credit issues. You can have your cash within a week.
2. Payback is automatic and daily, so you pay less when business is down and more when business is up.
3. The debt is unsecured and not personally guaranteed by the business owner and only paid if the credit card machine generates capital. If your business fails and you have done everything correctly, there is no personal obligation to pay it back, nor is there any additional collateral for this service.
Here is the trap. The advance is typically designed to be paid back within a 3-6 month time period, thus a 25% fee when recalculated as if it were interest and annualized can result in a comparable annualized interest rate of hundreds of percents.
If you happen to do well for a short time period and pay back more of the advance sooner then anticipated, the interest rate goes through the roof.
A decade ago there was one such merchant advance business and it advanced approximately $10 million dollars annually. Now there are over fifty such businesses offering this service and the anticipated advances this year are over $700 million – $1 billion, a very significant amount.
Keep in mind that there remains the already contracted and typical credit card fees for the intended use of the merchant account, so the 25% fee is above and beyond these fees!
It is unlikely that any business can afford such a financing arrangement for very long, or at all, as in the end not only will it absorb your profit, but it will create a larger cash flow issue then the one you were probably trying to resolve.
This is an easy source for capital desperately needed by typically un-credit worthy business strangled by inadequate cash flow, low gross revenue and slim profitability…and without any other more traditional capital creating alternatives being available, the advance may appear attractive and may eliminate some immediate problems, but this is probably not the way to resolve the real issues.
Think twice and reject the proposal when the high pressure sales person knocks on your door. It’s a trap for the unwary.
Find another way to resolve cash flow, profitability and gross revenue problems.
Call me if you need some help. 413-549-2966
I can honestly tell you that if it wasn’t for cash advances, my parents would’ve already lost their house 10 times over by now. I wouldn’t suggest getting one unless you’re in a really bad situation (like them), but they’re fine for emergencies.
Fantastic, as stated beware, when needed cash from any source at any price can be a life saver, however I would recommend that you and your parents look deeper and resolve the intrinsic issues that are defficient and caussing the illiquidity, be it low profitability, low gross revenues.
Until you resolve the base issues,causing the cash problem the cash squeeze will return…then what. As we all know you cannot live off such expensive money, resolving an emergency is ok, but it becomes addictive and difficult to withdraw from and can become fatal…Fix the issue and lose the Merchant Advance Account.
call if you want to discuss this further 413-687-8388 (cell)
hey, I agree with that… but, some people go through a vicious cycle of payday loans and cash advances before they’re able to dig themselves back out of the hole, but sometimes people don’t have any other options… no family or friends to borrow the money from, can’t find a better job, etcetera… some just don’t have a choice sometimes, y’know?
I understand, but all the more reason to focus on the cause of the issue and fix it as soon as possible as a Merchant Advance, like payday loan, is simply putting a bandaide over the disease.
Get help and fix the problem…
don
Hello have a cash advance and my business just recently closed due to lack of business. I owe about $8000 to a cash advance company from my merchant account. They are hounding me to pay back the amount owed. I have paid them back quite a bit of money but now the business is closed I was under the impression that if the buisness fails there is no need to pay back. Am I correct and what do I tell them.
Thank You
Pete
The presumed advantage of these deals is the fact that it is NOT personally guaranteed and thus if the business has failed and is no longer active, the debt is gone with it…however I have seen a fair number of people signing for personal guaranties as well, sometimes knowingly sometimes without knowing at all.
Review your paperwork and see what you did.
If its personally guaranteed its a problem.
If not tell them to pound sand and leave you alone.
If its personal, negotiate a workout,paying dimes on the dollar, over time if neccesary.
Hope this helps.
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Merchant account loan:
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