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How a merchant cash advance can trap your business

On Behalf of | Nov 17, 2023 | Merchant Cash Advances

Like most small business owners, when you need to expand or pay for the upkeep of your premises, you need to borrow money. However you might be reluctant to apply for a loan at a traditional bank for various reasons.

One alternative out there is the merchant cash advance, or MCA. This is a different type of loan that first became popular around 2009. But though MCAs can give some merchants who cannot obtain credit the old-fashioned way a method of infusing cash into their business, they can also be a trap. One that can put you in a downward cycle of debt and potentially cost you your business.

What is an MCA?

An MCA works differently than a traditional bank loan, in which you repay the money, usually with a fixed interest rate, in monthly installments. A conventional loan is generally secured, meaning the bank can seize one of your business’ assets if you default. With an MCA, you receive a cash advance that you pay back as a portion of every credit card transaction sale your business conducts per day. Usually, the lender requires a certain amount of payment daily or weekly, regardless of how good business actually was.

Another problem is that MCA lenders typically charge high interest rates that fluctuate based on your business’s sales and how long you take to repay the loan. If you run into a slow stretch of business, you could quickly run out of money or need to take out a second MCA to cover expenses. Instead of being a quick burst of cash, an MCA can become a huge burden. And MCAs are not federally regulated like traditional bank loans.

Finding a way out of the trap

If your business is in trouble over an MCA, you could have several options to help. Consulting an attorney who works in this niche area of the law can make a huge difference.