Imagine you’re dreamed about opening your own business. Now you’ve found the perfect store front, you’ve found a great marketing company to create your brand, and sales are finally coming in. You are having success, and you are ready to take the next step. So you gather all your financial documents and apply for a small business loan from the bank. You wait a few weeks for approval of your application, but the bank denies you the loan. You go through this process time and time again, but each and every time you get denied. You’re in desperate need of capital to keep your business growing, so where do you look next?
Many businesses will turn to a merchant cash advance. Merchant cash advance lenders will lend a startup or existing businesses a lump sum in exchange for a share of future earnings. These lenders usually automatically deduct a percentage of the business’ credit card transactions.
This financing route is often taken because these lenders are flexible and able to move quickly. They are not restricted to the same rigid criteria that banks face and consequently are much more open to taking risks when lending.
Although you may have to go through several merchant cash advance lenders to find one that suits your needs, all you have to do is a simple search on the Internet to find hundreds of companies that engage in cash advances.
One real advantage of merchant cash advances is that lenders will work with businesses that have little collateral or income, like startups. The loans are usually easy to apply for and are approved rather quickly, usually within just a few days of applying. This is a fast and easy way to gain access to capital.
Another advantage is that many merchant cash advance providers do not require you to provide them with a sales history before making the loan. This can be very helpful for businesses just starting out. Not to mention that these types of loans are lenient in their requirements for the creditworthiness of applicants, which removes many of the hurdles associated with traditional financing.
If the lender is a merchant cash advance company, which collects a share of future profits, the loan is not regulated by laws that limit interest rates. In this case, the interest rates on these loans are usually very high. The interest rates can range from 30% to as high as 200%.
In addition to the exorbitant interest rates, merchant cash advance lenders will often be entitled to take between 30% and 45% of all credit card sales until the loan is paid off. This means that your income will be considerably reduced until the loan is paid off. If business is slow, it can take a long time to pay off the loan. Combine this with high, compounding interest rates and you can easily be left with little to put into your pocket or invest back into your business. And, of course, failure to repay the loan in a timely manner can still result in a court judgment against you for breach of contract with the lender.
Because borrowing from a merchant cash advance lender is a high risk for any startup business, you need to make sure that you thoroughly check out any company or individual that you are considering borrowing from. Try to talk with other borrowers to find out their experiences. You can also check with your state or local Better Business Bureau and find out if there have been any complaints against the lender.
With so many risks associated with merchant cash advances, it’s best to apply for one as an absolute last ditch effort to start or save your business. The incredibly high interest rates and the lender’s direct entitlement to your sales often make this type of lending a big risk rather than a smart investment! If you would like help exploring other options, our team is always here to answer questions.