Small business owners often find themselves in need of a quick influx of cash to keep the doors open. In this situation, many hear about a merchant cash advance (MCA). This is a one-time financing strategy in which a business receives a lump sum that can, on the surface, appear to be a lifesaver.
Be wary. MCAs can carry annual percentage rates into the triple digits and lead to a never-ending spiral of debt that is impossible to pay off. Many consumer advocates consider MCAs to be a financing option of last resort.
How MCAs Are Structured
With an MCA, a business receives cash upfront in exchange for a percentage of future sales. For that reason, a business must have a steady monthly revenue of $10,000 or more to qualify. Instead of making a monthly payment on the balance, as you would with a credit card, an MCA requires making daily or weekly payments (plus fees) until the balance of the advance is paid.
How much is paid in fees is calculated using a complex formula that is based on a risk assessment “You need to have a clear path to revenue if you’re going to take on this money,” says Hanna Kassis of Segway Financial in a recent article for a small business trends website. “All of a sudden you’re giving up 10 to 20 percent of every dollar received.”
One upside of MCAs is they are unsecured, so you will not lose any personal or business assets if your business goes out of business and you fail to repay one. However, there are multiple downsides to this cash infusion option.
If you are a small business owner who wishes to learn about debt restructuring options or whether a business bankruptcy makes sense, obtaining knowledgeable legal counsel is always a smart first step.