If you’re a small business owner, you’ve probably heard about merchant cash advances (MCAs). Maybe you have already signed up for one. They sound like an easy way to get quick cash, but let’s be real — they’re a financial trap waiting to snap shut. Here’s why MCAs can be crushingly expensive and put your personal assets at risk.
Factor rates: the sneaky fee structure
Unlike traditional loans that come with interest rates, MCAs use something called a factor rate. This rate usually falls between 1.1 and 1.5. Don’t be fooled by these seemingly small numbers. They’re misleading. A factor rate of 1.4 means that if you take a $50,000 advance, you’ll be repaying $70,000. That’s $20,000 straight out of your pocket, gone — effectively, a 40 percent interest rate.
The more risk the MCA provider sees in your business, the higher the factor rate. If your industry is volatile or your credit score is less than stellar, expect to get hammered with higher rates. And it doesn’t stop there. The factor rate is just the beginning. Administrative fees, underwriting fees, and who knows what else usually get tacked on, driving your costs even higher.
MCAs are not loans: the loophole
Here’s the kicker: MCAs aren’t classified as loans. This means they aren’t subject to usury laws that cap interest rates and make loans subject to being adjusted or voided in court. Basically, MCA providers can charge whatever they want, and they do. Since these advances are repaid through a percentage of your daily debit and credit card transactions, there’s no escape. Your cash flow gets strangled day by day, making it hard to manage other expenses.
The bottom line
Too often MCAs are a wolf in sheep’s clothing. They promise quick cash but at the cost of your financial stability. The fees are astronomical, the repayment terms suffocating, and the lack of regulation means you’re at the mercy of predatory practices. If you are struggling to repay an MCA, or the provider is threatening your commercial or personal assets, you need to know your legal options as soon as possible.