Merchant Cash Advance Legal Issues You Need To Know Before Getting A Loan
As a business owner, you would continually need cash to help your business grow and function. Having said that, you will likely need a source that can provide you with instant capital and funding. Companies that offer merchant cash advance can give you quick business loans, which can get your business up and running in no time.
A merchant cash advance is usually a lump sum given to a business in exchange for future sales. Usually given to small businesses, it has short-term payments usually spanning 24 months. The regular payments with interest are usually paid by the business owner on a daily or weekly basis. In traditional bank loans, the payments are usually done on a monthly basis.
There are some instances where a merchant cash advance can be more detrimental than helpful to your business. And, because of that, you should know how to protect yourself. In line with that, the following are some issues related to merchant cash advances you should know before getting a loan:
1. Avoid Sky-high APRs
Merchant cash advance is the ideal way for small businesses to get a loan. Some firms may not qualify for loans in banks because their businesses are still new and they do not have an ideal credit score.
How does merchant cash advance work? For example, you have a bakery that needs funding of $20,000. A merchant cash advance can provide you with that amount, however you have to pay an interest of 1.35 percent, which will cost you 27,000 dollars in the end. However, what makes merchant cash advance probably disadvantageous is the amount of time allowed for you to pay for that lump sum.
You have to pay for that sum in a quick amount of time. If you make 10,000 a month, the merchant cash advance will normally have to take out 15% of your sales. The APR in this case is 106%, making the cash advance more expensive in the end. You may get sky-high APRs with your merchant cash advance, thus you have to analyze it before you agree to the terms. In some cases, you may even need merchant cash advance relief. APRs maybe triple digits, and merchant cash advances are actually the most expensive loans out there.
2. Debt Cycle Dangers
You are likely to get into a debt cycle when you sign up for a merchant cash advance. This type of loan needs to be paid quickly, and it’s usually used up before you know it. Once you have paid off the merchant cash advance, you will likely need a fresh infusion of capital because you are going to be low in cash. The more merchant cash advances you apply for, the more it will bleed your business dry because you will have to repay it on a regular basis, plus the rates are usually very steep. Merchant cash advances are expensive and can potentially hurt your business if you do not use them wisely.
3. Research On The Merchant Cash Advance Company
It is tempting to take up a loan on the first company that is ready to give you capital. However, you have to be wary and do your research on the company you’re applying for to make sure that they are legitimate and employ fair practices. You have to get to know all the essential details about the provider. Get to see if they have an established website. Also, try to see if they have customer service specialists with whom you can talk and discuss your specific issues and concerns. Furthermore, check if they have review sites to know about the experiences of their other clients. If you see that other businesses have had a successful experience, it can help you decide whether or not you want to take up their loan and work with them.
4. Convert The Pricing Structure To APR
As of now, there is still a lack of regulation when it comes to merchant cash advance, which means loan providers can quote their pricing in any way they want. Make sure to convert the interest rate into APR so you will have a better visualization of the amount you have to pay on the time provided. APR can help you see just how expensive a merchant cash advance can really be. You should also use a calculator to help you see if you can sustain the daily payments you have to make for the merchant cash advance.
Other lenders, such as banks, already provide you the APR and interest rates. However, if you are dealing with a merchant cash advance company, you may have to do this process by yourself since they are not regulated to give this information.
A merchant cash advance can seem like something that can save your business and give the necessary funds to run it. However, it can be a snake in the grass and terms can be detrimental if you are not careful. There is still a lack of regulation when it comes to merchant cash advances, so you have to protect yourself and make the necessary research and calculations to make sure that your business can sustain a merchant cash advance loan.