Merchant Cash Advances: What Business Owners Need to Know

By Robert Jacovetti

Merchant cash advances have grown in popularity over the past few years. The growth in popularity may be because merchant cash advances are often marketed as a “quick and easy” way to get money for your business. However, many people don’t know what merchant cash advances are or their dangers. Our New York debt relief team explains what merchant cash advances are, their disadvantages, and alternatives to consider.

Are Merchant Cash Advances Loans?

Merchant cash advances, also known as MCAs, are not loans. It is a purchase of your future credit card sales. The lender gives you a lump sum amount, and in return, they receive a percentage of your future credit card sales until the amount owed is paid back.

For example, let’s say you have a merchant cash advance for $20,000. The lender may get 20% of your future credit card sales until the $20,000 is paid. Due to high-interest rates, merchant cash advances may be challenging to pay back.

Dangers of Merchant Cash Advances

Several disadvantages come with merchant cash advances. Let’s explore the main three.

High Interest

First, as we mentioned before, merchant cash advances often have high-interest rates. This can make it a challenge to pay back the advance. You may end up paying more in interest than you originally borrowed.

May Become a Financial Strain

Another danger of MCAs is that they are often structured as daily or weekly payments. If your business has a slow week or month, you may still be required to make your regular payment. This may strain your business and make it difficult to keep up with your other expenses.

Will Not Help Improve Credit Score

Lastly, MCAs are often not reported to credit agencies. This means that taking out a merchant cash advance will not help improve your business’s credit score.

Alternatives to Consider

If MCAs are too risky of a business model, you can opt for other funding options, such as;

  • Short term business loans
  • A business line of credit
  • Equipment loans
  • Invoice financing

These options often have lower interest rates and may be easier to repay if your business slows down.

What If I Have Defaulted on My MCA?

Businesses often fall behind in their payments due to merchant cash advances being so difficult to pay back. It usually only takes a week or two of defaulting for the merchant cash advance company to pursue a lawsuit for breach of contract. If you have defaulted on your merchant cash advance or are close to doing so, it is crucial you seek the help of a lawyer who specializes in merchant cash advances. A lawyer will help you understand your legal options and help you protect your business.

Your Next Step

If you are struggling to repay a merchant cash advance, our experienced debt relief attorneys can help. We will work with you and the lender to develop a solution that is best for your business.

Call us today at (516) 217-4488 to schedule your free consultation!