Sometimes things happen and you need cash quickly. Nowhere is this more common than in independent and small businesses. Maybe there’s a sudden rush and they need to quickly restock inventory, upgrade equipment, reset after a tragedy, or quickly move into a new space!
This is where the world of predatory lending and Merchant Cash Advances thrive. Merchant Cash Advances, or MCAs, are a common short term solution that small businesses can access from online lenders like LendingTree, Fora Financial, or even their POS systems like Square. They thrive off your urgency and promise funding between $1,000 to even $250,000 in less than 24 hours with just a few taps on a screen.
If it seems too good to be true, it’s because it is. At their heart, a Merchant Cash Advance (MCA) is a predatory lending practice and here's how you can avoid them and still get funded.
What is a Merchant Cash Advance?
A Merchant Cash Advance is a way to get fast funding for a small business. It’s not a loan, but instead they pay you an upfront amount of cash in exchange for a portion of your sales transactions as well as a mountain of fees over a period of time. If you apply through your POS system, then the lender will access all of your revenue data to determine how much to advance without considering your expenses.
How do I spot a Merchant Cash Advance company?
There are a couple of ways to identify a Merchant Cash Advance company. Many of them will promote “Same Day Funding” or “Next Day Funding” - that’s your first sign.
Many Merchant Cash Advances also accept low credit scores. While of course, a low credit score is only one factor in a business’s financial health, since a Merchant Cash Advance is not a loan, they don’t need to be regulated like a loan.
Since a MCA company does not have to consider your credit score, they can make the terms of your advance whatever they want - often stretching out the repayment for years so they can collect more money off of you in fees and interest.
Why are Merchant Cash Advances predatory?
Any business promising to deliver up to $250,000 in 24 hours should make you skeptical about their practices. But why should you be avoid a MCA at all costs?
The first reason is their incredibly high "APR." Technically, Merchant Cash Advances don’t calculate APRs because they aren’t loans, but they will often use language that states they will take 7-8% of every transaction until the advance is paid off.
Some business owners end up thinking that that means their interest rate is 7-8% which would be absolutely reasonable. But that's not it at all. Since a Merchant Cash Advance is taking 7-8% of every transaction - sometimes before you've even paid any expenses or taxes, their APR can be anywhere from 50-90%.
Additionally, a Merchant Cash Advance has a much shorter repayment window - meaning that your monthly payment back is much higher. To put that in perspective, look at the table below to compare a conventional bank loan using a standard interest rate and a MCA
Merchant Cash Advance | Conventional Loan | |
Amount Financed | $60,000 | $60,000 |
Number of Months | 12-18 | 36-60 |
APR* *MCAs have Factor Rates which are adjusted to their comparable APR. | 50%+ | 14% |
Monthly Payment | $4804 - $6455 | $1396 - $2055 |
Total Cost | $77,461 - $86,472 | $73,980 - $83,766 |
Even though you may be paying back relatively similar amounts of money, the payback period for an MCA is far more aggressive and demanding.
The second reason Merchant Cash Advances are predatory is the hidden fees that often come with them. They don’t have to tell borrowers what their expected total cost or APR is going to be, and because these fees are often tacked on to the sales transaction, they’re easy to hide.
Merchant Cash Advances are also not regulated, not licensed, and don’t need a bank charter. This leaves a lot of liability up to the borrower.
Finally, Merchant Cash Advances often require the borrower to sign a Confession of Judgement, which essentially makes the borrower assume liability and damages even before they’ve defaulted on the advance. This means that they have no right to a legal defense if they wanted one!
I need money - how can I avoid a Merchant Cash Advance?
There are many ways to get funding for your business that don’t require Merchant Cash Advances. Here are a few options:
Establish a line of credit with your bank
Having a line of credit with your bank will allow you to take out money to apply toward your business, while also building upon your credit score. It might take a little longer than the “Same Day Funding” a Merchant Cash Advance promises, but it will be much safer to your bottom line.
Finance equipment for your small business
If you need to purchase equipment, many dealers allow you to finance through them to build credit - no bank loan required!
Run an investment crowdfunding campaign
Another way businesses can quickly and affordably access funding is by launching an investment crowdfunding campaign, such as with Honeycomb Credit. With an investment crowdfunding campaign, a business can let their customers invest in them starting at just $100 an investment!
This also takes a little more time than a Merchant Cash Advance, but once your campaign is launched, you can access your funding as soon as you hit your minimum goal!
Another benefit of investment crowdfunding is if you have fallen for a Merchant Cash Advance, you can refinance it for a much lower interest rate that’s financed by your community!
Avoid Merchant Cash Advances and find a better option
Honeycomb Credit is the way to beat Merchant Cash Advances and reach your business’s financial goals - all with the power of community investment. Learn more about Honeycomb Credit and investment crowdfunding by filling out the form below!
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