Disadvantages of Merchant Cash Advance (MCA)
What are the Disadvantages of
Merchant Cash Advance (MCA) ?
Merchant Cash Advance (MCA) has many disadvantages that you should be aware of before you enter into a Merchant Cash Advance (MCA) receivables purchase agreement. Weigh these disadvantages against the potential benefits.
1. MERCHANT CASH ADVANCE (MCA) IS AN EXTREMELY EXPENSIVE FORM OF FINANCING
The major disadvantage of merchant cash advance (MCA) is that the financing product is very expensive compared to other non-bank lending products. On average, you will pay from 40% to 50% cost above the amount you are funded (factor rate) and payback is over a short period of time, typically 4 to 6 months.
Merchant cash advance companies determine the amount you must repay by applying a factor rate to the amount of financing . The factor is often in the range of 1.40x to 1.55x. For example, if you finance $100,000 and the finance company applies a factor of 1.55, you must repay $155,000 ($100,000 x 1.55) during the term of the advance contract or loan which is typically 4 to 6-months.
2. MERCHANT CASH ADVANCE (MCA) IS A SHORT-TERM FINANCING OPTION, NOT A SOLUTION
Merchant Cash Advance (MCA) payback is over a short period of time from 3 months to 9 months. This short time frame is the main reason why cash advances are so expensive and dangerous to businesses. Because of the short term of Merchant Cash Advance, consider using the product only if your business can generate enough revenue to repay the financing (plus cost-of-financing or factor rate). Otherwise, using a Merchant Cash Advance (MCA) could become destructive.
3. MERCHANT CASH ADVANCES (MCAs) DO NOT SOLVE CASH FLOW PROBLEMS
Merchant Cash Advances are rarely used correctly or in a non-destructive way. The Merchant Cash Advance (MCA) product is not considered a loan, in a legal capacity, as it is a receivables purchase agreement yet the mechanics are almost identical to a loan.
In most cases, the company runs into financial problems a few months after getting the initial Merchant Cash Advance (MCA). Unfortunately, many business owners respond to this situation by getting a second Merchant Cash Advance (MCA) loan. They use the second loan to meet the payment obligations of the first loan, and for some additional cash flow. So a MCA is not a solution. It is the beginning of the destruction of your business. The start of an endless cycle of high-cost and short-term debt.
Before long, the company has multiple Merchant Cash Advances and multiple daily or weekly payments to try to manage. Having multiple MCA’s is called ‘stacking‘. Many businesses in a “stacked” situation get caught in a huge trap and continue to experience a perpetual cash flow crunch within the business. Often, the business cannot recover from it and needs to act quickly and start considering bankruptcy. Before you pack it in and lose your business to MCA “stacking”, we have Refinance and Restructure solutions for you for Merchant Cash Advance (MCA).
4. SELLING FUTURE SALES IN A MERCHANT CASH ADVANCE (MCA) AGREEMENT IS DANGEROUS
Finally, the biggest disadvantage of a Merchant Cash Advance (MCA) is that you are selling your future sales. This can be a problem for some businesses because the future is difficult to accurately predict – exposing you to the risk of getting a MCA and potential future sales decline either permanently or temporarily. The UCC (uniform Commercial Code) lien filed by Merchant Cash Advance (MCA) company gives them “creditor rights” to your business assets such as inventory, contracts, accounts receivable, etc. This puts all of your business assets at serious risk as well as the signer(s) of a personal guarantee(s) on the Merchant Cash Advance (MCA) receivables purchase agreement.
Please visit our informational pages on what SOLUTIONS there are to get out of the Merchant Cash Advance (MCA) virtually endless cycle…
Merchant Cash Advance (MCA) Debt Refinance-
https://www.kanjorskipartners.com/merchant-cash-advance-refinancing-consolidation
Merchant Cash Advance (MCA) Restructuring-
https://www.kanjorskipartners.com/merchant-cash-advance-and-business-debt-restructuring-services
Merchant Cash Advance (MCA) Help & Resources-