Exchange of financial documents

Weighing the Risks of Merchant Cash Advances

Small businesses that lack access to traditional sources of financing such as business loans can benefit from alternative funding products like a merchant cash advance (MCA). There are several risks to merchant cash advances, not the least of which is an event of default that could result in the business closing. 

If you need assistance with a merchant cash advance, talk to a merchant cash advance lawyer about your options. In the meantime, let’s take a look at the risks of merchant cash advances.

What You Need to Know About Merchant Cash Advances

A merchant cash advance provides a small business with working capital to finance various initiatives, from paying for inventory to expanding the business. On the other hand, there are disadvantages to this alternative funding product.

MCAs Are Not Regulated

A merchant cash advance agreement is a purchase and sale agreement, not a loan. As such, MCAs are not strictly regulated at the federal or state level. While there are disclosure requirements for MCA transactions in states like New York, MCA providers have control over repayment terms and rates, putting business owners at a disadvantage. 

MCAs Are Costly 

Merchant cash advances are not based on an interest rate associated with a loan, but rather a factor rate which is expressed in a decimal figure, typically between 1.2 and 1.5. When the factor rate is converted in an APR (annual percentage rate), however, the figure can rise to the triple digits, which is an exorbitant cost of funding. But merchant cash advances are not governed by state usury laws. 

Short Repayment Terms

MCA repayments may involve daily deductions over terms ranging from 90 days to 18 months, but MCA providers typically require shorter repayment terms (6-to-9 months), which is not beneficial for businesses seeking the maximum repayment period. 

Restrictions on Business Operations

Businesses that take MCAs are required to agree to restrictions on business operations. In particular, they may be prohibited from encouraging customers to pay with cash by offering discounts or taking other business loans while the advance is outstanding. 

The Takeaway

Ultimately, repaying a merchant cash advance can have an adverse impact on cash flows, which poses a significant problem if there is a downturn in business. By defaulting on an MCA agreement, both your business and personal assets are at risk of being seized. 

If you are dealing with this situation, contact today. A properly structured MCA contract will include a reconciliation clause that requires the funder to restructure the repayment plan under certain conditions. Our team will work to find a negotiated resolution and protect the business you’ve worked so hard to build.