Companies seeking to increase their working capital have more financing options than ever before. In addition to traditional commercial loans from traditional lending institutions, a small to medium-sized business may also choose to take advantage of asset-based loans, factoring, supply chain financing, angel investors, crowdfunding platforms, and merchant cash advance companies.

Each one of these financing options comes with its own pros and cons, which should be weighed carefully before choosing which method is right for your business. Unfortunately, business owners and financial executives looking to solve cash flow problems rarely have the luxury of extended research into options for increasing working capital. Many are attracted to the option which promises to deliver funding as rapidly as possible, which often leads them to choose merchant cash advance financing.

Keep reading to learn more about what merchant cash advance financing is and why it’s unlikely to be the best option for your company. The Commercial Finance Group has been providing companies in the Los Angeles area with a safe, more financially-sound alternative in the form of factoring for many years. Contact us to learn more!

How Merchant Cash Advances MCAs Work

Even if you’ve never heard of merchant cash advances in particular, you’re probably familiar with the very similar process of consumer cash advances (also referred to as payday loans). These less-than-savory lending solutions provide consumers with a certain amount of cash NOW in exchange for a sizeable percentage of income they’re likely to receive LATER (i.e. their check on payday).

Merchant cash advances work in a similar fashion, with some notable differences given the fact that they’re aimed at businesses rather than individual consumers.

Merchant cash advances are a financing product aimed at companies whose revenue is primarily gained through credit and debit card sales. These companies include restaurants, retail shops, and B2B enterprises that have branched out into eCommerce. Although it’s a type of commercial financing, merchant cash advance providers typically don’t refer to their services as “loans.”

When you agree to basic merchant cash advance financing, the advance provider gives you an upfront sum of cash in exchange for a percentage of your future sales. Another version of merchant cash advance financing includes getting upfront cash and then agreeing to repay that amount via ixed daily or weekly debits from your bank account, known as ACH, for Automated Clearing House, withdrawals. Your short term cash flow problems are solved, but it’s important to be aware of the fact that you may be creating bigger financial issues for yourself down the line.

Why Businesses Are Attracted To MCAs

If there’s the potential to create a financial crisis down the road, why do so many businesses choose to use merchant cash advances?

  • They’re Fast – When your company is experiencing cashflow problems, like an inability to make payroll, the only thing most business owners can think about is getting funding NOW. Merchant cash advances scratch this itch by promising money in your pocket within 48 hours, sometimes less.
  • They’re Unsecured – With traditional commercial loans, borrowers are typically required to put up some kind of collateral against the loan amount. This ensures that if the loan goes into default, the bank can take possession of the collateral and use it to pay themselves back. Unfortunately, this means the borrower is at risk of losing said collateral, which often something significant like their house. This risk isn’t present when using merchant cash advances, because they’re unsecured. The “collateral” is typically your future sales, although some MCA providers do require a personal guarantee of repayment in the event that sales falter.
  • They’re Flexible – Many MCA providers structure their repayment scheduled to be more flexible than a fixed loan payment. This means that because payments are based on a fixed percentage of your sales, they may be adjusted based on how well your business is performing.

Why You Should Be Wary Of MCAs

Think merchant cash advances sound like a great solution to your cash flow problems? Think again. There are some big drawbacks that many business owners fail to consider until it’s too late.

  • They’re Expensive – “The annual percentage rate, or total annual borrowing cost with all fees and interest included, typically ranges from about 40% to 350%,” explains NerdWallet, which is absolutely massive in comparison to most commercial loans. If your sales falter and your payments must be reduced, the total amount of your advance can end up being thousands of dollars more than the funding you received.
  • There’s No Early Repayment Benefit – In many states, paying back a traditional loan faster than anticipated means the total cost (interest) is less than may have originally been forecast. The same can’t be said of merchant cash advances, which rope you into paying a fixed amount of fees no matter what.
  • There’s No Federal Oversight – Since they’re not technically “loans” MCAs aren’t subject to the same federal regulations that govern other types of financing. This means the Truth In Lending Act doesn’t apply, which gives many MCA providers the opportunity to take advantage of desperate business owners.

Factoring Is A Safer Alternative To Merchant Cash Advances

If you’re experiencing cash flow problems that have you considering a merchant cash advance for your Los Angeles business, The Commercial Finance Group is here to let you know that there are alternatives. Rather than turning to unregulated MCA providers, why not work with a trusted and reputable factoring company instead?

Receivables financing allows you to turn unpaid invoices into the working capital you need to run your business. This process is much more reliable and affordable than a merchant cash advance, without increasing liabilities on your balance sheet. We’ve helped hundreds of companies all around the country, and together with other financing solutions, formed long-lasting relationships that help small to medium-sized businesses keep their heads above water.

Don’t allow your cash flow problems to back you into a corner or trap you in the vicious cycle of merchant cash advances. Contact The Commercial Finance Group to see how factoring receivables can help your Los Angeles business grow and thrive.