Merchant cash advances seem to offer advantages to a business that needs some extra liquidity, but nothing could be further from the truth. These advances work by loaning you money that you reimburse on an ongoing basis with payments from your credit or debit card sales. Another merchant cash advance method takes fixed debits from your bank account on a daily or weekly basis.
Frustration With Traditional Banks
If you’re a small business owner that is frustrated with traditional banks and their lending practices, you’re not alone. Forbes recently observed that the Small Business Credit Survey from the Federal Reserve noted the increasing difficulty for small businesses to get a loan from traditional funding sources.
In contrast, there’s very little paperwork involved in securing a cash advance, and the whole approval process moves quickly. Here are some perceived advantages of merchant cash advances and their corresponding realities.
Get Money Fast
This financing option can expedite the acquisition of the money you need to develop your business. On the other hand, this may be the first step to getting stuck in a continuous cycle of debt. The mandated payment schedule may leave you needing even more cash to keep up.
No Early Payment Benefit
If you need liquidity for a short amount of time and plan on paying back your balance quickly, think again about a merchant cash advance. You cannot get a break on interest charges by paying off your loan early. In addition, there’s no federal regulation on this type of financing because officially, its classification is as a commercial transaction.
The Loan Is Unsecured
Since there’s no equity on the line to guarantee the cash advance, a high APR is the rule of the day. While business credit cards can approach 30 percent, this type of funding regularly goes into triple digits. This can quickly unhinge the stability of a small business and send it into bankruptcy.