The dangers of a merchant cash advance

Business owners are familiar with the dire need of swift cash, either to invest in the company’s growth or to ensure its survival and often are tempted with the idea of taking a merchant cash advance to fulfill those needs.

Since a merchant cash advance is a common and easily approved source of financing, it is also popular. Yet, businesses take on higher risks when choosing this road.

You can read at length about merchant cash advance at Camino Financial, but in sum, these financial options give the company a certain amount of money that will be repaid based on the credit or debit sales that the business gets each day.

Some of those risks business take when financing its operation with a merchant cash advance are:

Higher interest rates. Since it’s a fast cash advance that you can access easily, the interest rates can go up to 350% of the borrowed money. This means that the owner will end up paying over three times what was given to him or her.

Shorter terms. As fast as it’sapproved, a merchant cash advance has to be paid back fast. Usually between 90 days to 18 months depending on the financial institution so, it’s not a long-term solution if you want to invest. It’s normally used to pay for a part of the operation that will provide fast income to the company.

Hurts the cash flow. Since thesekinds of products normally start charging on a daily basis, a bad sales day can ruin the cash flow of the company. Even worse, a business with high sales could get hit by the percentage of payments if it’s a business that depends on certain sales dates to ensure its survival.

Errors in bookkeeping. Since the payments will be automated to the company’s account, it’s easy to losethe amount of money already paid and the multiple charges by the end of the month and, so, by the end of the fiscal year.

Harmful for credit scores. Merchant cash advances are not directly frownedupon by credit score bureaus, yet your credit utilization ratio will get higher and, in doing so, your credit risk for other institutions. This could close doors for the company in the future.

Hidden fees. Since merchant cash advances are not actual loans, the conditions, fees and terms may not be as clear as when hiring a business loan. Quotas and penalizations can be as harmful as the daily charges.

Access to businesses accounts. Part of the conditions for this kind of financing is access to the accounts of the company to make daily charges but also, some of them require to sign a Confession of Judgement, a document that allows the lender to take hold of the company’s assets without warning to get repaid.

When a business goes through a bad patch, a merchant cash advance might seem like a good idea but in the long run it could do more damage that good to a company in any industry. There are multiple alternatives to explore in the financial world, it might take a little longer and have more requirements, but having a good proper planning can help any company achieve their financial needs.

It’s just a matter of planning ahead, conciliate with previous lenders or possible business allies to have more time to gather the money the company needs and being patient enough to research and shop for the right financial product that suits the needs of the business without harming it. Don’t forget to leave a comment if you have ever taken a merchant cash advance and how your experience was.

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