Merchant Cash Advance
Reasons to Think Twice About Merchant Cash Advances
Some entrepreneurs view a merchant cash advance as a great financing resource for their small business, but others aren't so sure. Despite what you think you know about merchant cash advances, it's best to approach them with a good deal of caution.
The merchant cash advance industry is huge -- in the coming years it is expected to top $10 billion per year in receivables financing.
The popularity of merchant cash advances among business owners as a short-term financing tool is unquestioned. But are merchant cash advances really your best or only option?
The answer to that question isn't so clear. The merchant cash advance industry has come under scrutiny for unethical and predatory business practices. Some merchant cash advance providers target and exploit small businesses that need cash, but feel like they have no other financing alternatives. In some cases, merchant cash advances have been a major contributing factor in a business' demise.
Are there reasons why a merchant cash advance might be a good idea for your business? Sure, but there are also a lot of reasons to think twice about merchant cash advances.
- High rates. Merchant cash advance providers are notorious for charging extremely high rates and premiums. In exchange for a lump sum cash payment, you are required to give them a percentage of future credit card sales until the payment and premium are repaid. Since merchant cash advance providers claim they are actually purchasing receivables rather than providing a loan, they are exempt from federal lending laws and allowed to charge rates that are equivalent to a 60% annual percentage rate - or more.
- Other fees. With rates that high, it's hard to believe that merchant cash advance companies also charge closing fees. But unfortunately, many providers not only charge closing costs, but also require their clients to switch to a higher priced merchant credit card account service. The truly insidious part is that these requirements are often buried in the contract or application so business owners don't know about them until it's too late.
- No collateral. Despite the merchant cash advance industry's claims to the contrary, these transactions are essentially short-term loans. But unlike other loans, they require nothing in the way of collateral. If you're unable to repay the advance out of future credit card sales, your merchant cash advance provider can go after your house and personal assets.
- Cash advance addiction. Merchant cash advances provide convenient and easy access to cash - and that's the problem. A lot of small business owners become dependent on cash advances for monthly operations. Instead of addressing the root causes of their cash flow shortages, their growing addiction to cash advances ultimately leads the business into bankruptcy.
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