Dangers of Merchant Cash Advances

A short article explaining some of the dangers behind Merchant Cash Advances (MCAs)

9/9/20231 min read

Merchant Cash Advances (MCA) are a popular financing option for small businesses that need quick access to capital. However, while MCAs can provide fast cash, they come with several risks that business owners should be aware of before choosing this type of financing.

One of the biggest dangers of MCAs is their high cost. MCAs often carry annual percentage rates in the triple digits (yes, over 100%), making them one of the most expensive financing options available. This high cost can create a difficult cycle of debt for small businesses, as they struggle to repay the advance and its associated fees. Why would anyone sign up for a triple digit loan? Often the loan terms are not clear because MCA contracts are written in a way that state smaller percentages (10%, 15%) that do not seem unreasonable. Those percentages do not refer to the interest rate, but to the percentage of a revenue. For help on calculating an MCA annual percentage rate (APR), see our article here.

Another danger of MCAs is their aggressive repayment structure. Unlike traditional loans, which have fixed repayment terms, MCAs are repaid using a percentage of a business’s daily credit and debit card sales. This means that the more a business earns, the more it has to pay back – which can seriously impact cash flow and profitability until the advance is fully repaid.

MCAs also come with the risk of stacking. Stacking occurs when a business takes out multiple cash advances at the same time. This can greatly increase the financial burden on a company and make it extremely difficult, if not impossible, to pay back the debt.

While Merchant Cash Advances can provide fast access to capital for small businesses, they come with significant risks. Business owners should carefully weigh the pros and cons of this type of financing and consider all other options before choosing an MCA. If you already took out a Merchant Cash Advance and you need help to navigate the situation and find relief, contact us today.