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A merchant cash advance loan is a choice many small business owners make. Those loans are a great way of obtaining extra cash to get through a slow time in their business. There is no collateral required, which makes them an ideal option.
MCA loans are a growing industry, but also have a high default rate. For this reason, about 10% of every payment you make to the lender is channeled into a "default reserve account." This account allows them to mitigate losses in the event you default the loan.
There are many risks to a merchant cash advance loan that can result in your inability to repay the cash advance. Read on to learn about these types of loans and their downfalls.
What Is a Merchant Cash Advance Loan?
Merchant Cash Advance, also known as MCA loans, became popular beginning in 2009. That was when it became more difficult for small businesses to obtain loans from banks. The purpose of these loans is to help the business float for a while until business kicks back in. The loan is not through a bank, but rather through a finance company that provides you with cash without physical collateral. What they do require is a percentage of your future sales. It is faster to receive your advance than it is when taking out a traditional business loan, but it comes with higher costs and riskier repayment schedules.
1. Merchant Cash Advances Are Not Loans
An MCA is not a loan, it is a cash advance, and therefore does not fall under the same law as loans do. This means they do not have a requirement for specific disclosures. One of the disclosures a bank must provide but a cash advance service does not is the interest rate.
The cash advance lender may also include in the contract judgment clauses that allow them to remove funds from your business bank account without court permission. The lender may file a lien against your business, file a report with credit bureaus, and more.
A 2018 Federal Reserve Report reveals that MCA loans are confusing for borrowers for several reasons, including:
Rather than being federally regulated, the regulation for MCAs is through each state’s Uniform Commercial Code. They are not subject to banking laws, such as the Truth in Lending Act. This means you as a borrower have no protection against unfair lending practices when using merchant cash advance services.
2. High-Interest Rates and Short Repayment Periods
While it may seem easy to receive approval for an MCA loan, their interest rates are exceptionally high and the repayment schedule difficult to maintain. In the majority of cases, the business will have to pay an annual percentage rate of 40% to 350%. With such high-interest rates, you could end up owing thousands of dollars for borrowing money for a very short period of time. This puts your business at risk of sinking farther into debt, rather than making a recovery. Compare the MCA rate to the national annual percentage rate (APR) on standard personal loans with a percentage rate of 9.34%, payable in 24 months. It is clear that MCA loans are exorbitantly expensive. Say for example you borrow $100,000 from a bank on a 5-year fixed-rate loan. You will have a locked-in interest rate and know what your payment is each month. That payment will remain the same throughout the duration of the loan. If you borrow that same $100,000 through merchant cash advance services, your loan will likely have to be paid off within a 12-month period. You will not have a locked-in interest rate, and the lender will be withdrawing a high percentage of your business income on a daily or monthly basis. Your payments will float up and down along with your business revenue.
3. Flexible No-Rate Clause
If your Merchant Cash Advance Loan has a flexible no-rate clause, the lender may adjust the percentage that is taken from your account daily. If your business goes through slow periods or is seasonal this may cause problems with your cash flow.
Because there are no regulations on the percentage they take, you may need to look at other small loan options that will reduce your monthly payment. This is a time when speaking with an MCA Defense Now agent can help prevent you from losing your business because of unfair loan practices.
4. Adding and Increasing Fees and Penalties
Because these loans are not regulated through the banks, the lender may be able to add fees, seize your property, or increase the interest rate if you are unable to make your payments. In some instances, cash advances have “borrowers fees.”
Every month that the business does not make a payment there is an additional charge. Other charges that may be arbitrarily tacked onto the loan include late fees, penalties, daily default payment fees.
5. You May Fall Deeper in Debt
When a business is short on cash, and then forfeits a high percentage of their daily revenue into repaying a merchant cash advance loan, they may find themselves once again short of funds. When this happens, some cash advance services will offer them an additional cash advance. This is known as stacking. The stacking of MCA loans is a business trap that can leave you floundering in debt, unable to recover. You end up with numerous repayment demands from your incoming cash, and the result likely will be more than the business can handle. Stacking increases your risk of defaulting on your MCA loans, leading to even more problems.
When you are at risk of defaulting on your Merchant Cash Advance Loan you need to contact MCA Defense Now. We operate as a referral agency working with the top debt and MCA defense attorneys in New York.
When you contact our office, we provide you with relief services that allow you to keep your business running while repaying your debt. You will work with an experienced merchant cash advance attorney who will assess your debt and guide you on the best way to reach a favorable resolution. Please contact us at 877-347-7007 to speak with one of our representatives. You also have the option of completing our online form. Don't run the risk of losing your business, call us today!