Understanding the Merchant Cash Advance
It’s no secret that most businesses often need debt to drive growth and profitability, and in an increasingly digital world, debt is becoming more accessible. However, the growth in debt accessibility isn’t universally a good thing. Some borrowing methods marketed to small business owners, such as merchant cash advances, have confusing marketing, poor underwriting standards and astronomic interest rates that can trap business owners in unsustainable debt cycles.
Although an MCA looks like a typical loan, the transactions are almost completely unregulated. This means that most small business borrowers are not shown the APR or expected monthly payment before they take out a merchant cash advance. And since cash advance issuers aren’t bound by any laws that limit interest rates on loans (usury laws), issuers can legally charge massive interest rates — in excess of 100% in many cases.
Most businesses often need debt to drive growth and profitability. However, the growth in debt accessibility isn’t always a good thing. Some borrowing methods marketed to small business owners, such as merchant cash advances, have confusing marketing, poor underwriting standards and astronomic interest rates that can trap business owners in unsustainable debt cycles.
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How a merchant cash advance works
Merchant cash advances technically aren’t loans. A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future sales. … Instead of making one fixed payment every month from a bank account over a set repayment period, with a merchant cash advance you make daily or weekly payments, plus fees, until the advance is paid in full.
- A business owner receives a set dollar amount in their bank account.
- In exchange, the business owner agrees to pay the issuer a fixed percentage of future credit card sales until the advance, plus a borrowing fee (interest), is paid off.
- Merchant cash advances are fixed-price loans. That means that a business owner will pay a fixed amount of interest for the upfront cash no matter how quickly they pay off the loan.
- Payments on cash advances are made daily, and fluctuate as sales volume fluctuates.
- Whether sales are up or down, the issuer is almost guaranteed to get their cut of the daily sales.
- A merchant cash advance contract would usually require you to agree to operate the business to the best of your ability and not undermine business performance in order to hinder your payments. You wouldn’t be responsible to repay the advance if the business fails for reasons outside your control.