Avoiding Default on a Merchant Cash Advance

By Robert Jacovetti

A merchant cash advance is an advance on future revenue which may not require a person to pay the advance back if his or her business fails. Merchant cash advances can be a business savior for some, however, it can be detrimental to others. The type of business, sales forecasts, and other financial information are all factors to determine whether a merchant cash advance is right for you and your business.

A major risk associated with borrowing money from any sort of fund is defaulting on the repayment. However, defaulting on a merchant cash advance has different consequences than defaulting on a loan. For starters, a merchant cash advance is a commercial transaction that is based on a business’s future revenues. Therefore, these lenders do not report to credit bureaus. Because of this, many business owners do not see a point to pay back the funds promptly, as it will have no effect on their credit scores. This sort of behavior can lead to them defaulting on the merchant cash advance. However, it’s best to avoid this behavior and treat the repayment of the merchant cash advance like you would a credit card or a loan.

To avoid defaulting on the merchant cash advance, it is best to create a repayment plan that will work for your business. Many merchant cash advances take a specific percentage of your credit or debit sales as repayment. To avoid running out of money, it is important to make this percentage manageable. Do not make the percentage too high, otherwise, you might not be able to meet your other business expenses.

Finding alternate funds may also be a good option for those with merchant cash advances to avoid default. All merchant cash advances use a factor rate, which is different than an annual percentage rate (APR). A factor rate is expressed as a decimal, rather than a percentage. For example, a common factor rate is 1.3. If your merchant cash advance is $10,000 at a factor rate of 1.3 for a 12-period, you will need to repay $13,000 ($10,000 x 1.3). With this, you may find repayment difficult. Some business owners tend to take a second merchant cash advance with a lower factor rate to pay back the original merchant cash advance. Depending on your business, this may work for you.

It is important to consult an experienced merchant cash advance attorney before engaging in any sort of merchant cash advance transaction. A skilled merchant cash advance attorney will be able to guide you and may be able to assist in obtaining the most suitable funding for your business.

The lawyers at Jacovetti Law, PC are experienced in representing clients in merchant cash advance defense matters, including debt resolution. Our merchant cash advance defense lawyers will work with clients to assess their debt situations and advise them on the best path to financial stability. To schedule a free 15-minute telephone consultation, contact our New York debt relief law office at (516) 217-4488 or fill out our contact form.