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Should you get a merchant cash advance?

On Behalf of | May 28, 2024 | Merchant Cash Advances

Running a small or medium-sized business in New York is demanding. You constantly juggle responsibilities and make tough decisions to keep your business thriving. In this endeavor, you could face financial turmoil. If you are considering a merchant cash advance (MCA), understanding its pros and cons is crucial.

What is a merchant cash advance?

A merchant cash advance, often provided by a private lending company, is a lump sum of funds given to a business in exchange for a percentage of future sales. Technically, an MCA is not a loan, but it also involves repayment with interest.

What are the pros and cons of MCA?

Before you get an MCA for your business, weigh its advantages and disadvantages first. MCAs can be beneficial for fast cash due to:

  • Quick access to funds: Unlike traditional bank loans, which can take weeks or months to process, you can get approval for your MCAs within days.
  • No collateral required: You do not need to have collateral for MCAs. This means that your personal assets or business equity would not be at risk.
  • Flexible payment options: Most lenders offer flexible payment terms, including adjusting the daily percentage of sales held back for repayment.

However, it can also offer drawbacks because of:

  • High payback: While MCAs can provide quick access to funds, they often come with high fees. The payback can be significantly higher than what you would pay on a traditional loan.
  • Potential debt cycle: Since the repayment is based on a percentage of your daily sales, slow sales periods can extend your repayment term and increase the total amount you owe. If your sales do not improve, this can lead to a cycle of debt that can be hard to break.

Missing a payment could result in increased fees, aggressive collection or a potential lawsuit.

Is MCA right for you?

While MCA seems like an attractive option, it requires careful consideration of the financial situation, terms of MCA and potential alternatives. As this can be complex, seeking legal guidance can be beneficial. They can help you understand the terms of your MCA, negotiate better rates and protect your business from predatory lending practices. With the help of an experienced lawyer, you can ensure that you are making the best decision for your business.