Merchant Cash Advance Myths and Facts
Every day we have clients contact us and describe the horrible experiences they have encountered with merchant cash advance lenders. The same issue we hear time and time again is that they thought the advance they were receiving was a loan and they did not take the time to review and understand the agreement they signed. They believed that their broker was telling them the truth, when in fact, their broker was only trying to get his commission paid by any means necessary.
There are many myths merchant cash advance brokers tell business owners. Many of these myths can also be found on the internet and commonly come from lender’s websites. These websites are designed to get you to take loans from them, so the information being conveyed is not entirely clear or truthful.
Are these merchant cash advances a safe and secure means of funding for your business? We will try to break down and dispel any falsehoods and substantiate the truths about what merchant cash advances truly are.
Although we advise you to stay clear of merchant cash advances, we do understand that traditional financing may not be available to you and a merchant cash advance is your only option. If that is the situation, take the time and educate yourself.
Claim #1 – Merchant Cash Advances Are Loans.
This statement is false. Most of our clients are so accustomed to traditional loans, that they just assume the paperwork they signed for their merchant cash advance is similar.
This is not correct. Merchant cash advances are not loans. With a traditional loan, you are lent money and required to pay it back over a fixed period of time, with a fixed payment schedule. A merchant cash advance is an advance of funds based on your future credit card receivables.
What is paid back depends on the daily credit card/sales volume that is brought into the business. An agreed upon percentage of the daily sales is taken directly out of the business bank account to pay the merchant cash advance funder.
The way in which the merchant cash advances are structured (not as a loan), they are not held to any regulatory standards that a traditional loan would have. There are no usury laws and interest rates and APRs can be well over 100%.
Claim #2 – You Can Only Use 1 Merchant Cash Advance Funder
This is entirely not true. You can use as many merchant cash advance funders that will approve you.
If a merchant cash advance funder feels you can afford a 2nd, 3rd, 4th, 5th or even 6th position advance, they will give you one. Some funders will pay others off, while others will take inferior positions. Merchant cash advance funders do not report to the credit bureaus, thus borrowers will sometimes take advantage of the lenders and obtain multiple advances from multiple different lenders within a short time period.
Many business owners are not prepared for the daily debits and cash flow decrease that occurs when the merchant cash advance funders begin taking funds from incoming revenue. This is when the vicious cycle begins, where the business must obtain additional advances to help pay the prior advances they have already received. This can lead to a business’s downfall and is a sure path to closing your doors forever.
Claim #3 – Merchant Cash Advances Are Tantamount to “Legal Loan Sharking”.
We would have to say this statement is true. If you calculate the interest rate and APR on many of these advances, you would agree with us.
We have seen interest rates well over 100% with many of the funders. With no state or federal laws regulating the advances, what makes this different from getting a loan from a loan shark?
Many lender websites would disagree because they use a factoring rate, instead of an interest rate. But when you do the math, the numbers don’t lie.
Lenders and brokers sell you on the 10-20% of your daily credit card sales that they will be taking as payment. This seems like it’s not a lot, but when you run the numbers and calculate the interest rate, your jaw will drop.
Keep in mind, not all merchant cash advance funders have such high interest rates, but a majority of them do. If you have good credit, some of the funders offer reasonable rates. Then again, if you have good credit, you would be applying for traditional funding not a merchant cash advance.
Claim #4 – A Bank Loan is a Better Option Than a Merchant Cash Advance
Yes, a bank loan is a much better option than a merchant cash advance.
Traditional funding has rates and terms that are much more appealing than a merchant cash advance. These types of loans would include installment loans, SBA loans, equipment loans, lines of credit and private loans. Each of these will likely offer better rates and terms that can help your business grow.
Merchant cash advances come with a very hefty group of junk fees that accompany their loans. Many times, this will increase the loan amount by 2-5%.
Claim #5 – You Can Only Use Merchant Cash Advance Proceeds for Specific Needs
This statement is false.
Merchant cash advance funds can be used for anything that will help your business. Working capital, buying inventory, new equipment, new locations, payroll, advertising, promotion and almost every other need. There are no limitations as to where the money can be spent.
Despite the freedom of choice in how you can spend the funds obtained through a merchant cash advance, you should still consider all of the other drawbacks of an MCA before signing for one.
Claim #6 – Bank Loans Are Much Easier to Obtain Than Merchant Cash Advances
This statement is false. The reason the merchant cash advance funders charge such high interest rates is because the advances are not difficult to get.
The funders look solely at 3 months of business bank statements, your time in business and your personal credit history. If you have over $10,000.00 in gross sales, a personal credit score of over 500, and at least 12 months in business (sometimes as little as 3 months in business), you can qualify for an advance.
The funders are primarily concerned with your income. If they feel your future sales could justify giving you money, you will qualify.
Conversely, bank loans require a strong credit score, an established credit history and may require years of a positive sales history in order to be approved.
Claim #7 – Merchant Cash Advances Take As Long As Traditional Loans to Get Approved
This is a false statement. If you are in dire need of quick cash, for a very short term, this is the one time we might suggest a merchant cash advance as the best means of funding.
Bank loans can take weeks or even months to get approved. Merchant cash advances can take as little as a day or two to get funding.
In that emergency situation, if you understand the fees and costs associated with the advance, a merchant cash advance may be the only way to obtain the needed capital quickly and easily.
Claim #8 – Collateral is Required to Get a Merchant Cash Advance
This statement is not true. Collateral is rarely, if ever, required for merchant cash advances.
If you have a healthy history of credit card sales/receivables, you do not need any collateral. There are some funders that will use real estate as collateral for the advance, but this is only seen when the dollar amount of the advance is upwards of a million dollars. Once again, you just need to show at least $10,000.00 in gross sales every month on your business bank statements to be able to qualify.
With the above myths and facts answered, we hope that you will take the necessary precautions before signing for a merchant cash advance. We hope that you will explore every other type of funding before you go down the merchant cash advance path of destruction.
Defaulting on advances is very common because most businesses do not comprehend how the funds will be repaid and how it will affect their daily cash flow needed to run the business. If you default on the advance, a lawsuit can be filed against you within a matter of days. The lender will try and sweep your business and personal bank accounts, come after your assets, and file UCC liens with your vendors which can hold up money that is owed to you.
Although merchant cash advances may be easier to obtain than traditional funding, these advances are not for everyone. You need to be fully cognizant of what the costs of the loan are and how the daily debits to repay the loan will affect the cash flow you are accustomed to receiving.
Don’t let the money they are waving in front of your face cloud your judgment. Ask yourself, is a loan with over a 100% interest rate make the most sense for my business right now?
Business Debt Law Group is always here to offer complimentary consultations to help you with your merchant cash advance needs. Before you do anything you might regret, pick up the phone and give us a call.