You require money to get your business up and running. Sometimes you might be low on finances, and the only option available is to get a merchant cash advance (MCA). However, before taking the plunge, it is vital to know that MCAs can cost you a lot in the long run and cause some serious cash flow issues in your business. Some business owners have found themselves in debt traps, while others have even filed for bankruptcy after being financially drained when paying back MCAs.
What are Merchant Cash Advances?
These are forms of small business loans, but the lenders do not acknowledge them as so. Getting an MCA means that the provider offers an upfront sum of money with the intent of getting a portion of your future credit and debit card sales. However, the payment for this amount can be in the form of fixed daily or weekly deductions plus the relevant fees from your bank account until the advance is fully repaid. These deductions are known as Automated House Clearance (AHC).
Why You Should be Wary of MCAs
High Annual Percentage Rate (APR)
The APR for a merchant cash advance can range anywhere between 40 and 350%, depending on several factors. This includes the repayment period, the amount advanced, the lender, and extra fees. When you get a bank loan, the annual percentage rate can be 10% or less.
No Federal Governance
MCAs are considered typical business transactions and not loans. Therefore, there are no federal regulations for the same.
Affects Credit Rating
A merchant cash advance is primarily designed for business people with low credit scores. However, the lenders also check your credit score when applying for these advances. If a hard credit check results from a credit inquiry, your credit score will be negatively affected.
No Early Repayment Incentives
There is no cut on the interest regardless of how quickly you repay an MCA. That is because, no matter what, there is a fixed amount that you are supposed to pay.
The affordability and fast processing of a merchant cash advance can have you remaining in a debt pool, especially if you do not qualify for any other type of business funding.
Getting a merchant cash advance can be a quick process, but its detrimental effects are seen in the long run. Contact Triport today to understand other ideal ways to fund your business.