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Advantages and disadvantages of merchant cash advances

August 17, 2017

Advantages and disadvantages of merchant cash advances

Merchant cash advance (MCA) is an easy and convenient means of small-dollar funding for small businesses. They come with several advantages and disadvantages, as mentioned below.

Benefits of merchant cash advances

  • Merchant cash advances are quick and easy to obtain. In most cases, the money is deposited into the borrower’s account within a week and without requiring extensive paperwork. MCA providers just look at a business’ credit card receipts to assess if they can repay the advance.
  • Merchant cash advances don’t require a small business to place a collateral in exchange for money. Thus, being beneficial for business owners, as their assets are not at stake even if their revenues and credit card receipts suffer due to slow business. However, most MCA providers ask borrowers for a personal guarantee, a legally binding document that holds them responsible for making the repayment.
  • If the repayment method agreed upon is based on a fixed percentage of credit card sales, repayments will vary depending on how your business is performing.

Disadvantages of merchant cash advances

  • Your annual percentage rate (APR) of the fees, as well as interest, could run into three digit numbers, ranging from 40% to 350%. Turning out to be a lot for expensive than the APRs on traditional bank loans, which are usually 10% or less.
  • The ease of availability of merchant cash advances can throw small businesses into the vicious cycle of debt. This is especially true for borrowers who have a bad credit score and don’t have any other means of financing. Borrowers may be forced to take another cash advance immediately after taking the first one because of high costs and the regular MCA repayments. Thereby, immensely affecting the cash flow of a small business.
  • Since merchant cash advances are organized as commercial transactions as opposed to loans, they are not governed by federal regulations. They are regulated by the Uniform Commercial Code in every state and not the banking laws.

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