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What risks can debtors face after taking out an MCA?

On Behalf of | Mar 5, 2024 | Merchant Cash Advances

If a business urgently needs funding, its owner can seek out various forms of financial aid, such as loans or merchant cash advances (MCAs). Specifically, MCAs can often serve as a lifeline because they are easily accessible, require minimal requirements or qualifications, and have significantly flexible repayment terms. Because of these benefits, businesses can consider it in emergencies.

However, MCAs can also have severe disadvantages because of their accompanying risks. In some scenarios, businesses can lose more instead of recovering, causing them to shut down because of the overwhelming financial burden. Before taking out an MCA, it can be beneficial to consider the risk factors, including the following:

  • It can be expensive. MCAs can become more costly than traditional loans, factoring in administrative fees and other costs.
  • The repayment amount can increase as the business’ sales go up. If this happens, the owner may pay more if they attempt to make advanced repayments.
  • MCAs are often not subject to federal restrictions. Since this option is technically not a loan, regulatory policies may not apply.
  • Terms and conditions may seem beneficial upfront but become disadvantageous over time. Some providers can have confusing clauses in their agreements, which can impact the debtor’s ability to take legal action later on.

Additionally, these risks can exist based on the business’ circumstances. This option could be helpful if the debtor has consistently high sales, allowing it to pay off the advance without problems. If not, the business may face issues sustaining repayments if its earnings are unpredictable.

Addressing MCA issues

Getting out of MCA can be difficult after setting up an arrangement. Business owners can find themselves in stressful situations when collectors go after them and ask for repayments aggressively. When faced with these scenarios, seeking legal guidance can be beneficial. Doing so can help them address issues appropriately and take measures to protect their rights as debtors.