business owner reviewing MCA

Challenges For Small Businesses When Inflation And Interest Rates Are Rising

Having cash on hand is critical for small businesses, especially during this time of high inflation and rising interest rates. Securing funding is more challenging, however, as lenders have tightened their credit criteria in response to recent moves by the Federal Reserve. 

Most recently, the Fed raised a key lending rate by 75 basis points (.75 percent) and may continue raising rates in a bid to tame inflation. So, businesses that need funding are turning to alternative products, including merchant cash advances. There are risks involved with these funding products, not the least of which is default and the potential for bankruptcy. 

Cash Is King

Cash flow is the fuel of any small business. Whether a startup or an established business, securing funding can mean the difference between success and failure, and failure’s no success at all. Small businesses need cash to navigate supply chain issues and absorb increasing fuel, labor, and raw material costs. The amount of funding a company requires hinges on factors such as:

  • Type of business
  • Time in business
  • Credit history
  • Use of funds

Securing a bank loan or line of credit may be an option for businesses that qualify, but others may need to consider alternatives. 

Alternative Funding Options for Small Businesses

Financing a small business in this environment is challenging but not impossible. Alternative funders and nonbank lenders can give your business funding more quickly than traditional banks. One option for a business is a merchant cash advance (MCA), which provides a quick source of working capital, and has fewer requirements and less stringent credit criteria.

Unlike a bank loan, an MCA is not pegged to an interest rate but a factor rate ranging from 1.2 to 1.5. Converting a factor rate into an APR (annual percentage rate) can produce a triple-digit figure, which is a very high cost of funding.

Another feature of an MCA is the holdback amount, which is the percentage of sales deduced each day from revenues. However, a business that experiences a receivables shortfall may not be able to meet the repayment terms and default. In this situation, the MCA provider can quickly move to seize assets, forcing the business to close.

The Bottom Line

Because of the current economic conditions, businesses must consider funding options carefully. And if yours has taken a merchant cash advance and facing default, you have options. By consulting an experienced merchant cash advance lawyer, you can reconcile your cash advance, restructure the payment terms, and protect the business you’ve worked hard to build. That’s where comes in. Our debt relief specialists work with small businesses around the country to reconcile their merchant cash advances. Contact our office today by completing the convenient intake form. Our team is available 24/7.