A merchant cash advance (MCA) is an alternative to a business loan. A lender provides a lump sum of money in exchange for a percentage of your future sales. You repay the advance plus a fee over time, typically through daily or weekly withdrawals from your merchant account. While MCAs can seem like a quick and easy way to access funds, they often have significant drawbacks that can negatively impact your business long-term.
Why are merchant cash advances risky?
While MCAs can be a convenient solution, they can also be quite costly. Here's why:
- High fees: While MCAs can be a convenient solution, they often come with significant costs. Unregulated, MCAs frequently involve high fees that can dramatically increase the overall cost of the loan. Annual Percentage Rates (APRs) can range from 60% to 200%.
- Rapid repayment: Repayment schedules are often daily or weekly, making it difficult to manage cash flow. This aggressive repayment can strain your business's financial health. Most lenders require full repayment within six to eight months.
- Potential for negative impact on business: If your business experiences a downturn, the intense repayment schedule can become a significant burden, potentially harming your bottom line.
- No credit building: Because MCAs aren't technically business loans, your payments aren't reported to credit bureaus. Thus, you won't build business credit. Despite your efforts to make timely payments, your credit rating won't improve.
- No prepayment option: Because MCA payments are automated and calculated upfront, making extra payments won't shorten the loan term or lower the total cost.
While merchant cash advances can provide quick access to funds, they often come with high fees and interest rates. It's essential to consider alternative financing options, such as bank loans which may offer more favorable repayment terms.
What are some alternatives to merchant cash advances?
- Live Oak Express loans: These term loans are designed to provide small businesses with rapid access to capital. These loans, which range from $10,000 to $500,000, can be used for various purposes, such as: working capital, equipment purchases, debt refinancing, hiring new staff and more.
- SBA 7(a) loans: The SBA 7(a) loan is a popular choice for small businesses due to its flexibility and government backing. It can be used for various purposes, including: business acquisitions, partner buyouts, real estate purchases, refinancing existing debt. With up to 90% financing from the bank, flexible terms and loan amounts up to $5 million, SBA 7(a) is worth considering.