Merchant Cash Advance Red Flags

By Robert Jacovetti

Many business owners looking for a quick loan with little hassle turn to merchant cash advances as a way to fund their business expenses. Some merchant cash advances offer benefits that appeal to business owners, including online applications, few documents required, and same-day funding. However, when it comes to securing a merchant cash advance, it is important that business owners proceed with caution. There are several red flags that business owners should be mindful of when looking to secure a merchant cash advance.

Elevated APRs

An annual percentage rate (APR) represents the total cost of borrowing over a one-year period. Unfortunately, many small business owners are often unaware that some merchant cash advances come with an effective APR reaching well into the triple digits. But how? Many merchant cash advance lenders do not disclose the APR. Instead, they’ll charge a factor rate. A factor rate and an interest rate are not the same. According to Merchant Maverick, to determine the total cost of borrowing, the borrowed amount must be multiplied by the factor rate.

Expensive Daily Payments

Merchant cash advance works by a lender taking a fixed percentage of a business’ daily credit card sales to repay the borrowed amount. For businesses that are experiencing a slow month of credit card sales, the merchant cash advance lender will end up taking less from the business’ total sales. However, if the business’ credit card sales continue to stay stagnant or improve over time, the business owner may end up paying more in daily payments to the merchant cash advance lender. High daily payments may hurt businesses that are already strapped for cash.

Potential for Debt-Cycle

Although many business owners turn to merchant cash advances for their immediate funding, many do not realize that the long-term consequence could be winding up in a debt cycle. Merchant cash advances can have expensive fees and require repayment in a short amount of time. Many business owners soon find themselves in need of more capital for their business after they apply for their first merchant cash advance. Borrowing more through multiple merchant cash advances can strain a business’ finances, leaving the business owner at risk of defaulting on payments.

While obtaining funding through a merchant cash advance may seem like a convenient and hassle-free option at the time, the long-term consequences may be dire. If you are a business owner that has recently defaulted or is about to default on a merchant cash advance, it is important to seek the guidance of an experienced New York merchant cash advance defense lawyer. Robert Jacovetti of Jacovetti Law, P.C. is an experienced merchant cash advance defense lawyer who works with clients to assess their debt situations and advise them on the best path to financial stability. For more information or to schedule a consultation, you can call (516) 217-4488 or schedule an appointment in our Mineola office.