MERCHANT CASH ADVANCES – BEWARE!

May 1, 2023

As inflation eats into margins and economic uncertainty puts businesses on shaky grounds, an immediate need for cash can be a significant problem. Many companies looking for quick financing find themselves considering a Merchant Cash Advance (“MCA”).  An MCA is not a loan. Instead, it is an advance against future receipts, trading immediate cash for a percentage of the company’s sales, plus fees. Unlike factoring, though, fluctuations in your cash flow come with extreme penalties, and any significant downturn very likely means the end of your business (and possibly your personal finances, too).

If you are considering an MCA, stop! Know exactly what you’re getting into. MCAs are extremely expensive, carrying fees that usually equate to well over 100% APR. MCAs take repayments and fees directly from your bank account, either daily or weekly. There’s no waiting until you get paid. If you don’t have the cash available at that time, the MCA is likely to charge significant additional fees or, worse, declare you in default. Most MCA providers require clients to sign confessions of judgment, both by the business and its owners, so a default means an immediate, collectible judgment entered against you and your business without any opportunity even to defend yourself in court. So, a downturn of just one day’s receipts can become an immediate financial ruin.

Before going down the MCA road, talk to your Relationship Manager about your cash needs. We may be able to help! A short-term “over-advance” may be available to help you pay for an immediate or unexpected expense. Restrictions do apply, but it’s definitely worth the conversation to see if you qualify before taking a step that could put your business at the edge of a cliff.