Small businesses that are strapped for cash might think that the merchant cash advance (MCAs) looks like a great deal. However, consider one thing: That quick cash could really cost your business (literally).
MCAs are known to carry annual percentage fees and some of those percentages are known to be quite a lot higher than others. Keep in mind that if it takes you any substantial amount of time to pay back the loan all of the fees and all could combine to cost you more than 300% of what you originally took the loan out for. This can cause even worse cash-flow problems for your business in the future.
This is why many businesses and lenders will consider and MCA loan a last resort in terms of improving their financial strategies.
How Does an MCA Work?
An MCA has historically been reserved for businesses who make most of their revenue comes primarily from credit and debit card sales. This meant these MCA loans were available for businesses like restaurants or retail locations. However, in more recent years these MCA loans have become available to more and more businesses. The MCA loan is made in exchange for a chunk of the business’s future sales (usually a specific percentage).
Repayments are scheduled through the Automated Clearing House (ACH) and they allow a business to pay daily or weekly until the loan and all fees are paid off in full. The amount you pay in fees depends on how long it takes the business to pay back the loan in full. The longer you take to pay back the loan the more fees you pay.
How Long Do These Loans Take to Pay Off?
Most of these MCA loans will be able to be paid off within 3 to 12 months. The MCA will usually take a portion of your credit card sales (usually about 10%) until the loan is paid off in full plus all the fees attached. Most loans will have money drawn out daily or weekly from your account through the ACH until the loan is paid in full. The amount withdrawn daily/weekly will be determined by how much business and how many sales you did that day and the set percentage they are taking from your sales each day to pay back that debt.
In the End, Be Wary of MCAs:
In the end, consider the fees you are paying and be wary of how much it may cost you to pay an MCA loan back before you decide to use one as a way to get “fast cash” for your business. It may not be worth in many cases when fees end up costing you 250-300% of what you originally took a loan for.
For more information on determining if an MCA loan is right for you please contact us at All Things Commercial Capital for further assistance.