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Is Merchant Cash Advance a Good Idea?

You’ve likely seen the ads, “Get funding in as little as 24 hours with a merchant cash advance!” So, is this kind of fast cash actually a good idea for your business? Let’s examine the realities.

What Exactly Is a Merchant Cash Advance?

A merchant cash advance (MCA) is, essentially, a lump sum payment – to your business – in exchange for a percentage of future credit/debit card sales.

You get capital upfront, then repay it daily, or weekly, with either:

  • A percentage of each credit/debit card transaction
  • Or a fixed payment, plus fees and interest, until the advance is paid back

Unlike a traditional loan, repayment amounts fluctuate based on your sales volume. But, make no mistake – an MCA is absolutely considered a debt product, not a cash flow loan.

The Catch With Merchant Cash Advances

The catch? Expensive fees and extremely high interest rates – often between 40-350% APR. There’s also:

  • Little regulation protecting businesses
  • Repayment periods of 3-18 months, which can strain cash flow
  • Potential double-dipping, or paying the advance company a percentage of all transactions – even those unrelated to the advance

So, what do you do, if you get hit – with one of these things? Do you simply accept the terms? Let’s discuss.

When Might an MCA Make Sense?

As terrible as they sound, merchant cash advances could work in limited scenarios, like:

  • Quickly paying expenses to keep your business open
  • Bridging a temporary cash shortage
  • Taking advantage of a killer business opportunity

But, they should always be an absolute last resort. Why? Let me explain, in detail.

See also  Virginia Beach Merchant Cash Advance Debt Relief Lawyers

Incredibly High Interest Rates Trap You in Debt

With rates averaging around 40% APR, but frequently over 100% – an MCA could easily trap you in a vicious debt cycle.

Think about it this way: If you take $50,000 at 40% interest, repaid over 6 months, you’ll pay back around $60,000 – an extra $10k in fees and interest alone.

At 350% interest, that same $50k advance would cost you a staggering $225,000 to pay back in full. No joke! Does that help the cash flow situation, or absolutely crush it?

Unrelenting Repayment Requirements

But, here’s where MCAs get even worse: repayment amounts fluctuate with your daily sales.

Meaning, you HAVE to hit certain minimums – regardless of your cash position. Don’t meet those minimums? They’ll stack fees on you.

Every. Single. Week.

It’s a suffocating repayment cycle that leaves you zero room for error, or slower sales periods. One disruption could choke your cash flow completely.

Consider Exhausting All Other Options First

Before getting trapped by a merchant cash advance:

  • IMPROVE cash flow through better receivables management – see if customers can pay sooner
  • SELL off unusued equiptment or inventory
  • SEEK out investors for equity funding
  • NEGOTIATE repayment plans with vendors
  • GET a low-interest line of credit from a bank
  • FIND a lower cost, trustworthy online lender

Only consider an MCA if it’s truly your ONLY remaining lifeline to keep operations running smoothly.

And, if you do?

Negotiate the Terms, or Walk

Don’t accept the first offer! Shop around, get multiple MCA quotes, read the fine print…

See also  NYC MCA Lawyers - NYC Business Debt Settlement Lawyers

And ruthlessly negotiate the interest rate, fees, repayment policies – everything. If they won’t budge much lower, strongly consider walking away.

An MCA should be an absolutely final, worst case scenario for temporary cash needs.

Build a Healthier Foundation

The truth is, requiring a merchant cash advance often indicates underlying business issues:

  • Inadequate cash reserves for operations
  • Poor cash flow management
  • An underperforming business model

If that’s your situation, you need more than a band-aid. You need to build a solid financial foundation:

  • Create cash flow forecasts to manage liquidity
  • Invest in systems to improve collections
  • Secure a low-interest line of credit for working capital
  • Potentially find investors for growth capital

Don’t risk getting trapped in an MCA debt spiral. Get to the root of your cash needs, and create long-term, sustainable solutions.

The Bottom Line on Merchant Cash Advances

Are merchant cash advances ever a good idea? In RARE temporary circumstances, perhaps – if negotiated ruthlessly. But, for the most part, these high-interest advances are FINANCIAL TRAPS to avoid at all costs.

Focus first on improving cash flow, building proper reserves, securing reasonable financing, and potentially rethinking your business model.

Merchant cash advances may seem tempting, but could ultimately CRIPPLE your operations and future. Make absolutely CERTAIN there’s no better way first.

Delancey Street is here for you

Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

"Super fast, and super courteous, Delancey Street is amazing"
Leo
$500,000 MCA Restructured Over 3 Years
"Thanks for helping me in literally 24 hours"
Jason
$250,000 SBA Loan Offer in Compromise
"Great choice for business owners who need a trustworthy partner"
Mary
$350,000 MCA Restructured Over 2 Years

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