Beware the Pitfalls of Merchant Cash Advances

By Robert Jacovetti

When a small business needs cash fast for a short-term need, some will turn to a merchant cash advance to leverage the required funds. A merchant cash advance is not a loan, but rather an advance based on the business’ future revenue or credit card sales. Typically, merchant cash advances are available to businesses whose revenue consists of credit card sales or receivable streams. Due to high-interest rates, lack of monitoring in the industry, and unforeseen circumstances that lead to financial distress, many businesses find themselves defaulting on the daily payments.

Businesses may seek a merchant cash advance for a variety of reasons, including purchasing property for business expansion, purchasing new equipment or stock, or as a means of paying the bills during a period where business activity is slow.

Despite the perks of a merchant cash advance, this means of short-term financing could leave businesses in hot water financially. When the borrower pays back the lump sum of cash that was used as an advance on the business’ future revenue, they must pay back that amount, plus a hefty premium. The payments are usually made through automatic deductions on the borrower’s daily credit card and debit card sales or directly from his or her bank account. According to the Woodstock Institute, borrowers of merchant cash advances often end up paying effective interest rates that can range in the triple digits.

If businesses can’t meet the daily payments, they may soon find themselves in a cycle of debt. The automatic deductions will continue as long as there is money for the cash advance provider to withdraw. To offset the costs of reimbursement and their business, some owners will take out new advances to meet the payments on older ones, plunging them further into the red. Defaulting on the repayment commitment may subject the business to negative credit reporting, as well as a lawsuit from the cash advance company.

For business owners who have fallen victim to the overwhelming payments or have defaulted on a merchant cash advance, it is important to get an experienced debt relief attorney on your side. Jacovetti Law, P.C. is experienced in handling a variety of debt matters, including merchant cash advance defense. Robert Jacovetti is a compassionate attorney who fights zealously on behalf of his clients for their legal rights and business interests. For more information or to schedule a consultation, contact our New York merchant cash advance defense lawyers at Tel:.