If your small business is considering taking out a loan, you might have heard about a merchant cash advance. You know how what seems too good to be true really is too good to be true? Here is one of those situations. As a small business owner, you’ll discover many hidden catches along the way to paying off a merchant cash advance. That merchant cash advance you’re considering might look good on paper, but let us at FSW Funding (FSW) show you how damaging it can be for your small business.
The Temptation of a Merchant Cash Advance
A merchant cash advance sounds simple, and it’s often advertised as a quick solution to a daunting problem. However, the drawbacks often far outweigh the benefit of the fast start.
A merchant cash advance is similar to a payday loan, albeit for a business, not an individual. Your small business offers a merchant a share of your future profit in return for a loan. When that future profit arrives, the merchant receives a percentage of that profit paid daily, weekly or monthly in the form of direct debits to your bank account.
Some merchants insist upon daily payments for a merchant cash advance. The annual percentage on a merchant cash advance will amount to a percentage between 70 and 350 percent. That percentage can often be higher than any traditional bank loan.
Merchant cash advances get sold to small businesses as a fast and simple solution. These cash advances tempt small business owners by the ease of the payoff. The sales pitch will likely make a merchant cash advance sound comfortable for the business to pay off as no set maturity rate exists, and during slow months, you can reduce the payment.
You can visit the websites of businesses that sell merchant cash advances, and the sites themselves may look helpful, direct, and honest. But this guise couldn’t be further from the truth. Some businesses that offer merchant cash advances don’t call them by this name. Be wary of companies that are offering small business loans or business cash advances, as these offerings might be merchant cash advances in disguise.
Potential Damage From Merchant Cash Advances
Small business owners have many reasons not to accept a merchant cash advance, since many of those reasons could put the health of your small business in jeopardy.
One potential danger of a merchant cash advance is that it often starts to dig your business into a hole where the only answer seems to be accepting another merchant cash advance. This debt hole quickly turns out to be bottomless, sending you into an endless spiral of debt collection that can’t easily be stopped.
Higher Than Average Interest Rate
Merchant cash advances sound like they are easy to pay off, but they’re a farce. Most merchant cash advances must be repaid with interest percentages between 20 and 110+ percent.
Difficulty Tracking Cash Advance Payments
Merchant cash advance loans are repaid as a daily or monthly percentages of business income, which make them hard to track. This lack of tracking enables your small business to easily be taken advantage of, and you’ll end up paying back more than you actually owe. In fact, the merchant repays itself before you can look at your own business profits.
Consistent Percentage Payment Required
Remember the sale pitch that sounds so comforting? “If business is slow, it’s OK; you’re only paying a percentage.” Well, how about the converse of this argument? If your small business is suddenly successful, you must still pay that percentage. In other words, you’ll be paying a consistent percentage of your business profits, making it difficult for you to achieve business and financial success.
A merchant cash advance is also risky and dangerous for your business because of natural market fluctuations. Paying off a merchant cash advance is dependent upon your business making money. A natural market decline could make this repayment much harder, and it is completely out of your control. This point brings us to another danger: A merchant cash advance requires no collateral.
Since a merchant cash advance requires no collateral, the merchant has no safety net. When the merchant has no safety net, that merchant is likely to require a higher interest rate. Banks and traditional loan services require collateral for a reason. Not putting up collateral puts your business at risk.
Getting Out of a Merchant Cash Advance
Remember, if you’re feeling pressured into accepting a merchant cash advance because it’s your last resort, walk away. Just because it seems to be your only option left, this option is probably a poor one. You should avoid having to put yourself or your small business in a position of having to take out a merchant cash advance, but if you already moved forward with this decision, you have only one way out.
Get smart, track efficiently, pay off the debt, and under no circumstances should you take out another merchant cash advance on top of one you already have. While securing another merchant cash advance may seem tempting, and although a merchant may try to push you toward that decision, a double merchant cash advance can be an even more damaging issue. If you are paying off a merchant cash advance, your best option is to seek financial advice to get out of debt as quickly as possible.
What Do You Choose Instead?
You’re probably wondering about the best way to fund your business: factoring. With flexible and affordable factoring, you use your accounts receivable income as collateral for a short-term loan.
Don’t let a merchant cash advance damage your small business or make it any harder for you to pay off debts. At FSW Funding, we can help you find the type of funding that is right for you and the needs of your small business. FSW specializes in flexible and affordable factoring options; let us help you find a financing solution for your small business.