For many startups, a merchant cash advance loan can be an appealing funding choice. But don’t forget to check out the drawbacks before signing the final agreement.
For all small businesses and startups looking for quick and accessible funding, merchant cash advance loan is an attractive alternative funding opportunity. It is typically used to cover cash flow shortages or urgent expenses. While an MCA can provide fast cash relief, there are some financial pitfalls that come attached to this type of funding which should be avoided at all costs. A lot of businesses while applying fail to read or understand the fine print, which later put them under financial duress in the future. With merchant advance loans, the key is to understand the terms and conditions of the loan agreement that can prevent businesses from making costly mistakes like stacking multiple loans and choosing a trusted lender.
This article will help you navigate the world of merchant cash advances and ensure responsible borrowing when evaluating an MCA as a funding option.
What is a Merchant Cash Advance?
An MCA loan is a lump sum amount given to firms in exchange for a percentage of their future credit card sales. This type of loan makes it a good choice for businesses with unstable revenue streams, as payments get adjusted according to daily sales. But, this loan often come with high fees, making them more costly than traditional loans.
Common Pitfalls in Merchant Cash Advances
It is true that MCAs do provide a quick funding fix and is appealing as a small business financing option. They can be a powerful tool to raise urgent capital. But many small businesses and startups often disregard the long-term costs and potential risks in exchange for quick money, which then accumulate into higher cost of the overall loan amount. Check out the most common pitfalls of merchant cash advances and how to avoid them.
1. How Stacking Multiple Merchant Cash Advances Can Lead to a Debt Trap
Many small businesses make the mistake of taking our multiple MCAs simultaneously to meet growing financial needs. This process is called stacking and, while it may seem like an easy solution in the short term, it can become a major problem as payments are deducted daily from your credit card sales and the amount can eat into your profits, leaving you in a financial mess and looking for another loan to fix the problem. It becomes a vicious cycle of debt that is hard to break.
How to Avoid It:
Borrowers need to be strategic about the reason for taking out an MCA. If there is already one advance to be repaid, avoid taking out another unless it is absolutely necessary. Plan your cash flow properly for the slow seasons to avoid the problem of stacking.
2. High Costs and Fees
One of the benefits of a Merchant Cash Advance loan is its quick approval process. But the speed of convenience comes at a high cost. The factor rates for MCAs is between 1.2-1.5, which means you could end up paying as much as 50% more than the amount you borrowed. These fees can add up fast, making the entire process overwhelming and the chance of defaulting also increases.
How to Avoid It:
Check out different merchant cash advance companies and compare their rates. Ensure you completely understand the total cost, evaluate whether your business can repay it before signing the final loan agreement. It is important to assess your sales consistency to ensure you can handle the daily deductions without putting pressure on your cash flow. Otherwise, it will become too overwhelming.
3. Choosing an Unreliable Provider
All merchant cash advance companies operate differently. Some are even infamous for not disclosing hidden fees and have unclear repayment terms as well as predatory lending practices. This can put any borrower in a vulnerable position, especially those who are new to this area of financing.
How to Avoid It:
It is vital for a smooth loan experience that you select a reputable provider offering transparent terms. You need to do deep research on potential lenders by checking reviews, testimonials and their standing with regulatory bodies. Any good lender will explain the terms and fees upfront without hidden surprises. Check out other alternatives if an MCA does not suit your business goal.
4. Lack of Understanding of MCA Terms
One of the most common mistakes that borrowers make is not completely understanding the terms of the MCA. In the face of fast cash, many businesses forget about crucial details like the repayment structure, factor rates, or duration of payments.
How to Avoid It:
Don’t forget to read the fine print. If you don’t understand any terms, don’t hesitate to ask the lender for clarification. Additionally, it would be wise to consult with a financial adviser who specializes in this category and help you understand how an MCA fits into your financial strategy.
Conclusion
For many small businesses and startups, a merchant cash advance can be a powerful tool, but it is always advised that you understand the drawbacks to prevent it from becoming a financial burden. By avoiding the temptation of stacking, selecting the right lender, understanding the terms and high costs it comes with, a borrower can make an informed decision. It is crucial for a business’s success that you do your research before committing to any financing option. With the right strategic approach, a merchant cash advance can become the powerful tool it was designed to be, rather than a shackle that prevents your company from growing.
