Is a merchant cash advance right for my startup?

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Is a merchant cash advance right for my startup?

Merchant cash advances, while boasting the advantages listed above, also come with a fair share of disadvantages. For that reason, they’re not always the best funding option for your business. We’ve listed a few reasons why an MCA isn’t for everyone.

Merchant cash advances aren’t regulated

Unlike highly regulated banks and lending firms, merchant cash advance providers aren’t bound by legal restrictions. For that reason, some MCA contracts charge extremely high interest rates and tack on unreasonable repayment terms-capitalizing on potentially desperate business owners.

They’re more expensive than traditional loans

Compared to other financial products, MCAs are comparatively more expensive. While business loan rates generally range from 6.25% and 12% online personal loan Nebraska, merchant cash advance rates can fall anywhere from 5% to 20%. In fact, the annual percentage rate (APR) for an MCA fee can be as much as 200%.

Your business operations could be limited

As with almost everything in life, there will always be a small subset of the population that tries to cheat the system. Merchant cash advance companies need to protect themselves against founders who have received a merchant cash advance but then encourage their customers to pay by cash. After all, no funds are held if the business doesn’t receive any credit card payments!

To protect against this, most lenders place limitations on how you operate your business as it relates to credit card payments. Some contracts prohibit you from discouraging customers to pay by credit card and offering special discounts for cash payments. Certain contracts may even prohibit business owners from switching credit card processing companies during the repayment period.

Merchant cash advances are a quick and straightforward solution to meet your immediate funding needs. And while they can be more expensive than some of the other small business funding options out there, their speed and convenience can mitigate the potential opportunity cost of traditional business financing.

Before you jump to apply for an MCA, take the time to carefully consider alternative financing options, including crowdfunding (and peer-to-peer lending) and private equity and angel investors, among many others.

  • Recent credit card processing statements
  • Recent business tax returns
  • Proof of citizenship

You don’t need perfect credit

A big reason why founders turn to merchant cash advances in the first place is because they have trouble securing more traditional loans requiring a credit check. Whether due to bad credit or a lack of credit history, small business owners who are unable to secure funding through banks often look to merchant cash advance companies as a suitable alternative. Most lenders do not require perfect credit. That being said, they will likely require you to meet a minimum credit score (usually between 500 and 600) in order to qualify for an MCA.

One requirement of many MCAs is a business credit score. If your company doesn’t have a business credit card, however, the lender will instead look at any existing loans and/or whether your business has applied for financing in the past.

Payments are flexible

Unlike a traditional bank loan, in which you’re locked into a fixed payment plan, merchant cash advance payments are proportional to the amount of business you bring in each month. This can be especially beneficial to startups, as payments are reduced during slower months in which credit card revenue was lower-allowing them to stay afloat as they work to secure additional working capital.

You don’t have to put up any collateral

If you’re worried about personal liability, a merchant cash advance could be a wise choice to fund your startup. Unlike other means of financing, your company assets are not at risk should you default on the payments. This is because there is no collateral requirement for MCAs, unlike invoice financing, for example.

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