In the complex landscape of business financing, merchant cash advances (MCAs) stand out as a unique and often controversial option. Primarily aimed at businesses in need of quick funding, MCAs offer a lump sum of money in exchange for a portion of future credit card sales. Understanding the nuances of this financial product is crucial for any business considering it as a funding option.

What is a Merchant Cash Advance?

A merchant cash advance is not a loan but a financial agreement where a business receives a lump sum upfront. This amount is then repaid through a percentage of the business’s daily credit card sales. It's essentially a sale of a portion of future sales revenue to the cash advance provider.

Uses of Merchant Cash Advances

Much like traditional business loans, MCAs can be used for a variety of purposes. Businesses often use them for advertising, inventory purchases, expansion, renovations, or acquiring new equipment. Providers like Square Capital and others offer MCAs as a form of working capital for businesses that might be short on cash.

The Benefits of Merchant Cash Advances

Merchant cash advances do have certain advantages:

1. Relaxed Eligibility: MCAs are accessible to businesses with less-than-perfect credit but strong credit card sales, making them an option for those who might not qualify for traditional loans.
2. Speed: The application and funding process for MCAs is typically much faster than for conventional loans, often taking only a week or so.
3. No Collateral Required: Unlike some business loans, MCAs don’t require personal collateral, reducing the risk to the business owner’s personal assets.

The Downsides of Merchant Cash Advances

However, the cons of MCAs often outweigh the pros:

1. High Costs: MCAs are not regulated in the same way as traditional loans, leading to significantly higher costs. The effective annual percentage rate (APR) for MCAs can be exorbitantly high, sometimes reaching triple digits.
2. Confusing Repayment Terms: The percentage of sales model can make it difficult to determine the actual cost of the advance. It's a common misconception that the percentage taken from sales equates to an interest rate.
3. Potential for High Repayment Amounts: Businesses with strong sales may end up repaying much more than anticipated, as there is can be a benefit for quicker repayment.
4. Risk of Business Closure: If a business goes under, the owner might still be liable for the cash advance, depending on the contract terms.

Considerations Before Opting for a Merchant Cash Advance

Businesses should weigh their options carefully before opting for an MCA. While they can provide quick access to funds, the high costs and potentially unclear repayment terms pose significant risks. It's essential to read and understand all contract details and possibly consult an attorney for clarity.

The Bottom Line

Merchant cash advances offer quick access to capital but at a high cost. They should be considered only after exploring other financing options. Businesses must approach MCAs with a full understanding of their terms and implications, ensuring they make an informed decision aligned with their financial health and long-term objectives.

With SPS and our partners, if the business closes, the owner is not responsible for the balance. Find the right relationship.

Be careful out there and get with the right partner with the experience to know what small businesses need. Reach out to me directly at the number below or schedule a zoom if you need help or just need a free consultation.