Home Merchant cash advance Beware of these types of very expensive loans

Beware of these types of very expensive loans

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Banks are still haunted by their own shadow after the financial collapse of 2007-2008. Thus, they categorically refuse to lend to small business owners who experience permanent cash flow gaps. Left behind, small business owners look to other lenders for quick and easy cash to keep up.

Here, we will analyze why you should be wary of certain types of loans and show you other loan options that you can consider.

Merchant cash advances (MCA)

Cash advances from traders are “payday loans” for companies. An MCA company pays you a cash amount that you pay back daily, weekly, or monthly with a percentage of future sales on credit. They are very expensive, have hidden fees, and APRs can easily skyrocket to triple digits.

Why MCAs Are Attractive To Small Businesses

Cash advances from traders present themselves as a good loan option. They quickly offer cash to business owners with poor credit without the need for collateral. Rather than fixed monthly payments, they have a seemingly straightforward repayment process – daily or weekly deductions directly from sales. Again, their fees are not expressed as a percentage but use smart factor rates of 1.2 to 1.5 to determine fees.

Why ACMs Are a Very Expensive Form of Funding

Despite the allure and appealing nature of ACMs, they are among the most expensive financing options available. Here’s why you might want to avoid these types of loans:

High APRS

MCAs do not have a standard borrowing rate. Average annual percentage rates hover between 40% and 120%, but can go as high as 400%! Small business loans typically have APRs below 10%. While credit cards have higher rates, they’re nowhere near what you’ll get with an MCA.

The catch is, you won’t see APR MCA in black and white like you would with other types of loans. They are masked by rates of complex factors between 1.2 and 1.5. Due to the lack of federal regulation, there is little transparency in the disclosure of fees.

Very expensive financing options

Let’s say you take a cash advance of 30,000 to be paid daily within 180 days with a factor rate of 1.4. You will end up paying $ 42,000. That’s a total interest of $ 1,2000. It is very expensive! Unless you make sky-high profits, the cost of the loan becomes more than the value it brings to your business.

The cost of borrowing with an MCA loan eats up your daily profits. When you finish paying off the loan, your business won’t have grown, and you could end up worse off than what you started. Again, MCAs offer short repayment periods of 3 to 12 months. If sales are low, repayment may take longer and the lender may add a fee of 5-10% of the loan amount.

A borrowing cycle trap

Cash advances from traders can easily get you into the trap of the borrowing cycle. Their predatory APRs prevent you from keeping enough cash to run your trading activities. Due to the short repayment cycles, you’ll have a hard time keeping enough cash on hand. At the end of the month, you may not have enough money to cover payroll, rent, and utility bills.

Without any options, you will be forced to go for another MCA funding round. This is how companies lose control and go into debt.

A better option for MCAs

While MCAs can offer a quick fix to cash flow when you run out of options, they are very expensive and can be a death trap for your business.

The best alternative to an MCA is a small business loan. Small business loans are cheaper, have a straightforward application process, and you will get your money in a matter of days. Unlike MCAs, small business loans will not put you in debt. For example, Camino Financial offers small business loans on favorable terms and flexible payment periods within 2-10 days.

Ultimately, you are much better off financing your business with a small business loan than an MCA.


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