Businesses sometimes need quick access to funds to manage unexpected expenses, cover operating costs or take advantage of new opportunities. In such situations, a merchant cash advance (MCA) could seem like a better solution than traditional business loans, which may take a long time to process and approve.
While MCAs can provide you with fast access to funds, they may create long-term challenges if you do not carefully review the contract terms.
Red flags to watch out for in MCA agreements
Spotting red flags early helps you protect your daily revenue and avoid funding arrangements that can jeopardize your business. Here are some things you should keep in mind while signing an MCA contract:
- Confession of judgment clauses: These clauses allow the funder to take a judgment against you without allowing you to present a defense. It gives them the ability to take action without providing advance notice, leaving you with fewer options to respond if a problem comes. While New York law heavily restricts their enforcement against out-of-state businesses, predatory funders still include them to intimidate business owners.
- Fixed daily or weekly payments: Some contracts require you to make the same payments every day or every week despite a decrease in sales, which can lead to financial issues. It can also be hard to reduce payments if your income is lower than expected.
- Using unclear costs and hidden fees: MCA contracts may contain confusingly worded clauses or include additional charges which can make it difficult for you to identify the true cost of funding.
You may also be required to repay the full amount even if you pay off the advance early. Some agreements may restrict you from obtaining additional funding, which can create further financial challenges.
Reviewing your MCA contract before you sign
A merchant cash advance can seem like an easy way to fast capital, but understanding the fine print closely can help you avoid costly surprises down the road. Reading the contract carefully and watching out for these warning signs can help you avoid a funding arrangement that creates more problems than it solves.