How to Know if Your Merchant Cash Advance is Bad
Did your merchant cash advance funder give you a bad loan/advance?
At some point, most businesses require additional funding to cover short term expenses or help their businesses grow. Traditional bank funding is obviously the most logical means of attaining additional capital, but it is not always realistic.
You must have decent financials, good credit, adequate personal net worth and sometimes collateral to secure a loan. Many businesses who do not qualify for traditional bank financing are forced to take a merchant cash advance. This is basically an advance (loan) predicated on your future sales.
What Can Be Found in a Merchant Cash Advance Agreement?
Now that you have obtained a merchant cash advance, the question many people ask themselves is “What did I get myself into?” Many clients we communicate with tell us that they believed they were acquiring a traditional type of loan, signed all the documents without properly reviewing them and soon after come to realize they have a merchant cash advance debiting daily from their bank account at an interest rate they don’t fully understand or comprehend.
Merchant cash advance brokers are notorious for misleading people about the type of loan they are receiving in order to just close the sale. Do not sign any paperwork without carefully reviewing the terms with someone who fully understands how these advances are structured. In fact, before you apply for a merchant cash advance, you should do your research to ensure that the information your broker is telling you is correct.
You need to pay close attention throughout the entire merchant cash advance process, rather than researching after it is too late and come to the realization that you just signed a loan at a 200% interest rate.
Even those clients who know they are obtaining a merchant cash advance, do not always grasp all the terms. They are focused solely on the money that they are about to receive and don’t realize what a huge mistake they just made until it is too late.
Merchant cash advance brokers know that you may be in a desperate situation and will exploit this and take advantage of you.
Did you know that these brokers are able to lower the fees they are making on any transaction and usually make on average 10%? Did you know that the advance funders can also lower their fees to compete with other advance funders?
Most MCA brokers sell you on the amount of money you will be receiving and the daily debit that you will need to pay in order to pay back the merchant cash advance. They will rarely delve into the details of the true cost of your merchant cash advance.
Questions to Ask When Receiving a Merchant Cash Advance
Some questions that should asked when receiving a merchant cash advance are:
- What is my factor rate?
- Are my daily withdrawals based on my sales or are they fixed?
- If the withdrawals are based on my sales, what percent is taken out daily?
- What other junk fees will the MCA funder add in?
- Is there a discount if the loan is paid off early?
Annual Percentage Rate (APR)
With a traditional loan, an Annual Percentage Rate or APR (total annual borrowing cost with fees and interest) must be disclosed to you. This is not the case with a merchant cash advance.
Merchant cash advances are not required to disclose the APR to you.
Did you know the average APR on a merchant cash advance ranges from 40%-350%, whereby traditional loans from banks are regularly less than 10%? The factor rate, fees and term determine the APR. The shorter your term, the higher the APR.
It is very difficult for anyone to calculate the APR on a merchant cash advance. These agreements are worded in a manner to be very vague and ambiguous and are unlike any other type of loan. The agreements use non-traditional terms to specifically confuse you and many of their fees are hidden in the fine print.
Let’s help you understand what each of these questions above are asking.
What is the Factor Rate?
The factor rate is the rate at which your interest is charged. For example, if you receive a $100,000 advance at a factor rate of 1.4, you would need to pay back $140,000, which includes $40,000 in fees. Merchant cash advance factor rates average from 1.2 to 1.5. The higher the factor rate, the more money you are paying for the advance.
Are the Withdrawls a Percentage of Sales?
The next question to consider is “Are your daily withdrawals a percent of your credit card sales? If so, what percent?”
Your merchant cash advance funder is repaid by taking a portion of your daily sales until they are paid back in full. For example, if you make $50,000 per month in revenue and the merchant cash advance funder takes 10%, this equates to $5,000/month.
This amount is normally amortized over 22 working days, which would be $227.00/day being withdrawn from your bank account. If you signed an agreement that did not have fixed payments, the daily withdrawal figure would change dependent upon the amount of monthly revenue.
If you make less money, then the term of the loan would lengthen based on the decrease in the revenue. If you signed an agreement with a fixed payment, the dollar figure would remain constant throughout the entire term of the advance, no matter what your revenue is for any given month.
Next, “What are the junk fees associated with your advance?”
Many merchant cash advance loans have tons of junk fees. These fees normally average around 3%-5%, but can be as high as 20%.
The names of some of these upfront junk fees may include:
- Contract/loan origination fee
- Facility fee
- Wire fee
- ACH program fee
- Risk assessment fee.
Again, sometimes these fees are hidden deep in the agreement or in the fine print, while others are right there in plain sight.
Is There a Discount if the MCA is Paid Off Early?
Lastly, “Is there a discount if the loan is paid off early?” or “Is there a loan pre-payment penalty?”
As odd as it may sound, some funders will penalize you for paying the advance off early since the funder will make less interest from the advance if it is paid off early.
In the alternative, there are a few merchant advance funders that do not charge a pre-payment penalty and may even reward you for paying the advance off early. You need to ask and understand what your obligation is for the merchant advance being offered.
Understanding MCA Agreements
Once you have a chance to closely examine an MCA agreement, you will quickly see how confusing and misleading the costs and repayment structure are. These agreements are very difficult to comprehend, even for someone who is well versed in reading contracts.
There are vague and unclear terms placed in these agreements to intentionally confuse you so you will not truly understand what the structure of the loan repayment is as well as the fees associated with the loan.
You may even be required to sign a document called a confession of judgment, which forfeits your rights to defend yourself in court if you default on your payments. Did your MCA broker even mention this document or just glossed over it like all of the other documents?
Most merchant cash advance agreements are completed via docusign, an electronic means of signing a document. It quickly moves from signature to signature not giving you an opportunity to read the documents you are signing. We always suggest printing a copy out and reviewing the documents with someone who is familiar with these types of agreements.
As quickly and easily as you were able to obtain a merchant cash advance, it’s just as quick you come to realize that you cannot afford the daily debits that are being syphoned from your bank account.
Often times, these advances harm a business’s daily working capital. When this occurs, business owners will sometimes go out and obtain a second, third, fourth, fifth and even a sixth merchant cash advance.
With no federal oversight, there are no rules and regulations to protect your business from these predatory loans. This vicious cycle will only lead to the eventual closing of your business and filing for bankruptcy. Thankfully, there is a way out.
Contact a Merchant Cash Advance Attorney
If you are at the point where you can no longer continue to pay your daily debits or have already defaulted on payments, you should contact a merchant cash advance attorney.
Merchant cash advance attorneys have the knowledge and expertise to work with your merchant cash advance funders to help resolve the issues your business may be facing. The attorneys can help with restructuring, forbearance options, lawsuit defense, asset protection and workout a settlement that is most advantageous for you and your business.
Merchant cash advance attorneys arbitrate and mitigate with the MCA funders to settle your existing merchant cash advances.
Recently, one of our attorneys settled a $139,900.00 merchant cash advance for $12,000.00. A 91.4% savings from what was owed.
Although past performance is not entirely indicative of future outcomes, many times we see a 60%-70% savings from what was owed. We will gladly send a copy of this settlement or others to you for viewing so you can see the amount of savings that can be accomplished.
It is in your best interest to pick up the phone and call a merchant cash advance attorney who can guide you through the process and review any and all options that may be available to you. Consultations are always complimentary.