Traditionally, a New York small business owner looking to expand or in need of quick cash would go to a bank or other lender and apply for a business loan. In recent years, an alternative called a merchant cash advance (MCA) has arisen. They both purport to help businesses and involve receiving a lump sum and having to repay it in installments. But there are differences between MCAs and loans that you need to know before deciding which way to go.
Bank loans
Banks usually require security in exchange for the loan in case the debtor ever defaults on repayment. Items that can secure a business loan include real estate (such as the business’s premises), a vehicle or equipment, often the asset the business is purchasing with the money. The bank can then try to seize the collateral. Other common features of a small business loan include:
- A set schedule of repayments (such as monthly) calculated to end in full repayment within a certain period
- A set interest rate
Merchant cash advances
An MCA is not a loan — it’s a cash advance. The MCA company purchases a percentage of the business’s future credit card sales. The advance gets repaid through the MCA company taking a portion of those sales directly or through a bank account it controls. This means that laws and regulations that protect debtors in small business loan transactions do not apply to MCAs. Frequently, it also means daily or weekly payments to the MCA company instead of monthly as is traditional with bank loans. A slow week or two could put your business in serious financial jeopardy or at risk of losing the business assets you put up as collateral.
If your business is struggling because of an MCA, you could have options for defending your company’s property. A conversation with an attorney who practices MCA law could be very useful.