Running a franchise can be lucrative if you have steady sales and access to working capital. While a merchant cash advance can help your franchise make payroll, acquire inventory, and cover expenses, expected and unexpected, there are risks. Let’s discuss whether or not your franchise should take a merchant cash advance (MCA).
How MCAs Help Franchises
Most banks will not extend credit to franchises, even those with perfect credit and outstanding revenue, so franchises turn to MCA providers. A merchant cash advance is not a loan. Instead, it is the purchase and sale of future receivables in exchange for a lump sum of cash.
An MCA can help to maintain cash flow and provide working capital to hire new staff, pay outstanding debt, renovate your location, and grow your franchise. Approval is quick and easy, and funds are available in 3 to 5 business days. Monthly credit card sales volume dictates payment terms. Payments are lower when sales volume decreases. This provides stability to franchises that lack access to traditional sources of capital.
Spoiler alert: merchant cash advances are risky and contain onerous terms that can force a franchise into bankruptcy. Let’s review the pros and cons of MCAs for franchises and what to do if you default.
Is A Merchant Cash Advance Right for My Franchise?
An MCA provides working capital for purchasing inventory, obtaining supplies and equipment, meeting payroll, and covering unexpected business expenses. A merchant cash advance may be a funding option if your franchise has consistent sales.
The MCA provider advances a lump sum of cash in exchange for a percentage of your credit sales. That percentage, known as a “holdback,” is based on the advance amount, the payment term, and prior monthly sales. While MCAs are sold as “no interest” or “no collateral required,” read the fine print.
An MCA is based on a factor rate up to 3 times as high as an interest rate or APR (annual percentage rate) for a traditional business loan. Also, MCAs are repayable in as little as 3 months to no more than 18 months. These short payment terms and high factor rates make merchant cash advances an expensive form of funding.
Another risk is defaulting on an MCA agreement. If the franchise cannot meet the repayment terms, the funder can quickly get a court judgment and seize the business assets, forcing the franchise to close. Also, MCA providers typically require franchisees to sign personal guarantees, which means the funder can levy your home, car, bank accounts, and other assets.
How To Reconcile Your Merchant Cash Advance
The experienced debt relief specialists at ReconcileMyMCA.com can help if your franchise is about to default on a merchant cash advance. A properly structured MCA agreement will include a reconciliation clause requiring the MCA provider to restructure the payment plan if the franchise experiences a receivables shortfall.
We can help to negotiate your payment plan and explore alternatives if reconciling your cash advance is not feasible. We work to protect small businesses and franchises around the country and have an impressive track record of success. Contact our office today by completing the convenient intake form.