Understanding Your Merchant Cash Advance Agreement
It is imperative to read your Merchant Cash Advance agreement very carefully. Terms and conditions contained in the agreement may lead you to filing bankruptcy. It is your responsibility to have a clear understanding of your Merchant Cash Advance agreement.
What is the difference between a bank loan and a merchant cash advance?
Perhaps the safest business financing aid is a traditional bank loan. The reason for this is that banks tend to have the most affordable and predictable rates, and terms that are fixed and fully disclosed, and the smallest possibility of being bought or sold. However, in exchange for stability you will have to meet strict requirements and will need to provide collateral as security for the loan.
Bank loans permit a business owner to borrow money for an agreed period of time with a set interest rate, thus payments are fixed and do not change over the term of the loan. It may take 6 weeks to 6 months from application until approval.
On the other hand, a merchant cash advance involves short term financing in which the cash advance company purchases a portion of a company’s future credit card sales at a discount. A percentage of the company’s daily Visa and Mastercard receipts is deducted by the funding company as repayment. There is no collateral required, and turn around times are much shorter.
Advantages and Disadvantages of a Merchant Cash Advance
There are strict regulations that govern bank loans to ensure that no predatory practices are put into place. Since merchant cash advances are not considered loans, funding companies claim that they are not governed by state usury laws that limit creditors from charging interest rates. This technicality permits them to operate in a largely unregulated market and charge much higher interest rates than banks.
Advantages of a Merchant Cash Advance
- Quick approval, even if you have less than a perfect credit score,
- There is no collateral required so your assets are not at risk if you fail to repay
- Minimal paperwork
Before signing your Merchant Cash Agreement, it is important to understand the disadvantages of a Merchant Cash Advance. These include:
- Predatory practices, as no government or industry regulation on interest rates,
- APR’s may fluctuate between 30% and 200%
- No fixed repayments- the more you make the more the funding company may take,
- Payback terms may end up being short, as repayment amounts fluctuate depending on sales volumes,
- Credit card sales are used to calculate the advance amounts and not the business’s total sales,
- Unless the business owner pays the entire balance with no discount, a cash advance can not be paid off early.
Since funding companies are willing to lend to high-risk borrowers, they charge very high interest rates to ensure that they make a profit even when the borrower defaults. As such, be sure to read your Merchant Cash Advance agreement thoroughly. Failure to clearly understand
How Can Merchant Cash Advance Lead To Filing Bankruptcy?
Due to the fact that the merchant cash advance industry is not regulated, it may be easy for a business owner to take out several cash advancements at the same time.
As a result of the high interest rates and the short repayment term, one cash advance on its own will likely cost your company a substantial amount of money. Thus having two or more cash advances may easily push you towards bankruptcy.
Take into account that each funding company will be taking a (large) percentage of your credit card sales as repayment. In circumstances where you have two cash advances, companies take up to 30% each from your credit card sales, thus you will only end up with 40% of your sales as revenue to pay your bills and employees. Consequently, this will lead to cash flow issues and you will need to take out a third advance leaving you with only 10% of credit card sales as revenue.
It is simple to see how this vicious cycle may spiral out of control and lead you to the brink of bankruptcy. If you have defaulted on your Merchant Cash Advance or have been hit with a lawsuit and would prefer to avoid filing bankruptcy, our attorneys can help. Schedule your free initial consultation today.