Getting a merchant cash advance has many pros, but there are some significant cons to consider. Before you visit a lending company, read over these disadvantages to discover if a merchant cash advance is really the right type of financing for you.
High Factor Rates
A merchant cash advance isn’t considered a loan, and it doesn’t have to follow the same rules and regulations. Rather than interest rates, this type of financing charges a factor rate, because the company is buying future credit card sales rather than loaning a sum of money. The factor rate may not look that bad, but when it’s calculated as a percentage of interest it becomes apparent that the interest rate is quite high. Overall, this makes the interest rates very high for merchant cash advances, and often the rates can reach triple digits.
High Fees
Along with high factor rates, merchant cash advance companies also charge substantial fees. The costs vary from company to company, so reading contracts before agreeing to them are essential. Common charges include start-up, processing, and payment fees. The high interest rates and fees can make it difficult for a business to complete payments by the end of the term. Some merchant cash advance groups choose to send the remaining balance to collections, which is reported to credit bureaus and reflects negatively.
Short Term
Unlike a loan, a merchant cash advance has a very short term. Rather than years, this type of financing must be paid off very quickly and is directly withdrawn from your credit card sales. While the amount of time is different for each company, some finance businesses offer terms of four to eight months. The more money borrowed usually results in longer terms, but they will not be as long as a business loan.
Payment Methods
Payment methods with merchant cash advances are less flexible than loans’. In most circumstances, the money is directly removed from any credit card transactions processed throughout the day. Another payment method used includes credit card sales deposited into a bank accepted by the finance company. At the end of the day, the funds withdraw, and the remaining amount is sent back to the business via wire transfer. Many choose not to use this method because it results in a one-day delay in profits, which can upset cash flow.
