Is a Merchant Cash Advance for Small Businesses a Good Idea?

E.J. Simonsen | Apr 20, 2023

If your small business is facing financial difficulties in paying bills or employee wages, you may be exploring funding options to ease your burden. You've come across advertisements for merchant cash advances or 48-hour no-credit-check business loans that promise quick cash with an easy application, and it has piqued your interest.

But is taking a merchant cash advance a good idea for a small business? Are they too good to be true? Follow along as we explore the ins and outs of merchant cash advances and how they can impact your business. 

What Is a Merchant Cash Advance?

A merchant cash advance, also known as an MCA, is a non-traditional, alternative financing product. The business is given a near-instant cash advance in exchange for a pledge of repayment from future sales. In other words, a merchant cash advance is a business payday loan. 

Are Merchant Cash Advances a Wise Choice for Small Businesses?

To answer this question simply – no, merchant cash advances are not a good idea for a small business. 

MCAs are extremely risky, not only because the business is borrowing against income it hopes to generate at rates often exceeding 200% APR, but also because MCA contracts claim they are given a blanket lien over every business asset. Sadly, taking an MCA often traps small businesses in a vicious cycle of debt, leading them down a path to eventual collapse.

5 Common Dangers of Merchant Cash Advances

The reality is that merchant cash advances are almost always a poor choice for small business owners. They can be dangerous, and here are the main reasons why:

1. MCAs Are Largely Unregulated

Merchant cash advances have almost no regulation. This means there are few, if any, protections for you and your business from an MCA lender. Unfortunately, even if you make timely payments, you can fall victim to the deceitful tactics of the most unscrupulous MCA lenders. Things such as collecting double payments the day after a national banking holiday or promising a line of credit with traditional rates, but then switching it to another MCA before closing. 

2. MCAs Aren't Technically Loans

Merchant cash advance lenders claim MCAs aren’t loans. They claim this to avoid interest rate caps on commercial loans in states, such as Texas, where the maximum rate is 18%. This claim also allows them to hide the annual percentage rate (APR) which are often in the triple digits.

3. MCAs Require Immediate Payments

After accepting a merchant cash advance, payments begin immediately, often the next day or week. This frequently results in a significant portion of the advance being spent on nothing other than repayments, leaving less money for the original purpose. Even the most successful of businesses can struggle to keep up with high costs such as these.

4. MCAs Are Easy To Misunderstand

Merchant cash advance contracts can be confusing. Between factor rates, repayment schedules, and tracking percentages of your daily sales, there are a lot of moving parts. Plus, MCA lenders rarely provide standardized APR disclosures in their agreements, making it challenging to compare these products with other types of financing.

If you don’t understand the actual cost of borrowing, it can turn a tight cash flow problem into a total catastrophe for your business and your personal finances.

5. MCAs Don’t Have Early Repayment Benefits

Once the cash advance is received, MCA lenders require you to repay a fixed amount of fees no matter what. Therefore, you can’t save on interest costs by repaying early. 

So Why Do Some Small Businesses Choose MCAs?

Now that you know some of the dangers associated with merchant cash advances, you might be wondering, why do some small businesses choose MCAs?  

It’s just as important to educate yourself about what makes MCAs attractive as it is to know their risks. Here’s why some businesses might opt for a merchant cash advance:

They’re Fast and Easy To Attain

MCA lenders rarely check credit scores, and businesses can receive funds within 48 hours, making them appear like a quick, easy fix.

They Don’t Require Giving Up Control or Equity

For some businesses, MCAs may be one of the only sources of borrowed capital they can obtain without giving up control or equity, such as adding an investor or partner. 

A Costly Injection of Capital Could Be Required

An injection of costly, high-risk capital might be the only available solution when a business is facing an extinction-level event or short-term cash crunch. If the gamble succeeds, the business survives and can work on restoring profitability and saving money for future crises. 

Better Alternatives to Merchant Cash Advances for Small Business

More often than not, merchant cash advances are not a good idea. There are a variety of solutions that are far better options when your business needs capital, which might include:

  • Bringing on a business investor or partner
  • Selling assets or a part of the business
  • Asking for deposits or advances from customers
  • Requesting an extension of credit from vendors
  • Pledging equity or assets 
  • Short-term business loans
  • Equipment loans
  • Invoice factoring 

If your business is financially struggling or trapped in an MCA debt trap, contact an experienced business debt attorney or law firm. They can walk you through the best option for your unique situation.

If you or your business is in Texas and you want someone from your own backyard in your corner, contact us today.  

The Lane Law Firm's business debt relief attorneys work to help clients resolve issues related to merchant cash advances every day. In fact, in 2022, we accomplished more than 400 personal guarantee freedoms, and we're here to help you, too. 

Get in touch with our knowledgeable team today, or schedule a time for your free case review when it’s convenient for you.

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