Disadvantages of the merchant cash advance loan
Merchant Cash Advance (MCA), also called a commercial cash advance, provides relief to a number of businesses that are not approved for loans due to risk, low credit rating, lack of acceptable collateral, or industry first. With all the advantages that MCA offers, business owners would still prefer a loan or line of credit. This is because the interest rates charged by MCA providers can be as high as 30% -200% APR, an unaffordable cost for any commercial company.
Points of sale for merchant cash advances
MCA providers go to great lengths to convince clients that the business cash advance is not a loan. It is a purchase of your future credit card sales. Therefore, it does not involve the gibberish of acquiring a loan. The advance is transferred to your account in about a week; There is no guarantee; the payback rate is a percentage of your monthly sales, therefore it fluctuates with business income; no pressure; minimal paperwork; and high approval rates.
At the same time, there is also a high payback rate, a short-term payback period (usually 9-12 months), and in many cases a contract that is as comprehensive as possible.
Merchant Cash Advance – Is It A Sugar Coated Pill?
Business owners who have no financing options other than MCA quickly realize the hole the advance reduces to their income. While some ethical vendors are working to keep the industry clean, there are those who leave very little for a business to drive growth. The recovery rates supposedly by reputable providers are less than 9%; even as low as 1% for low-margin companies. However, many companies have to pay up to 30% as a premium on the money advanced to them.
Another major drawback of MCA is the ambiguous contract between supplier and customer. The terms can be so broad that a company can be in default by making even the smallest changes to its business model. Suppliers evade this charge by claiming that they pay the loss if the business goes under. However, this in no way reduces the risk to the customer.
The fact that MCA is not a loan is also your biggest risk, since it is not regulated by the laws that govern credit institutions. This gives providers a lot of leeway. The contract is your only safe place, so it’s doubly important that you fully understand it.
What is the way forward for the MCA industry?
The MCA industry has been growing despite its high cost. Industry leaders acknowledge that scammers among them will not only bring the profession into disrepute, but will also attract the attention of regulators. They have joined forces to form the North American Merchants Advancement Association (NAMAA) to bring some order to the industry. NAMAA has published guidelines for clients to protect them from unsavory vendors.
It is not feasible for all types of companies to obtain financing from conventional sources. For them, the MCA is an option that, although expensive, is the only one available. Third-party brokers often portray MCA as a boon for struggling businesses. However, it is essential to understand its disadvantages before taking it on. In fact, ACM’s own professional providers want to be seen as a source of funding for growth rather than liberation.
