The merchant cash advance industry has experienced a significant growth in recent years, as banks have tightened credit and more and more small-business owners have sought quick cash without going through a difficult loan application process. A merchant cash advance costs a borrower more than a loan, but the ease with which it can be obtained and the attractive repayment scheme, where a fixed percentage of the daily credit card sales is collected until the advance is recovered, typically in less than 12 months, makes them highly appealing. Businesses that can benefit most from them are those new to the market or those have a poor credit rating and no collateral and find themselves in need of a significant sum to cover some unpredicted expenses or take advantage of an unexpected opportunity.
High Rates and Fees
The true interest rates of the merchant cash advance industry, usually referred to as the annual percentage rates or APRs, have traditionally been significantly higher than standard loan rates. Merchant cash advance providers can easily charge over 50% APR, with some going so far as to charge 200% APR. These high rates mean that businesses that request advances often have to repay thousands or even tens of thousands of dollars on top of the sums they’ve borrowed. Also, most providers feature an originating fee that’s taken from the actual sum borrowed (can be anywhere from 2% of the borrowed sum to over 10%) as well as monthly servicing fees (around $10 or more), which further increase the true cost of a merchant cash advance.
Exorbitant as the interest rates may be, the fact that merchant cash advances can be obtained in just a matter of days and can be paid directly from credit card sales makes them a viable option for many businesses. Merchant cash advances are the last resort for some small businesses that need them to get out of difficult situations or merely as working capital to survive. Also, providers are known for their open policy, in that they really accept candidates that no bank would ever consider offering a loan to. Even businesses with really bad credit and no collateral can benefit from merchant cash advances, so long as their monthly credit card sales reach the provider’s minimum requirement.
Choosing Providers With Care
Merchant cash advances fuel a multi-billion-dollar industry and, so long as the credit remains tight, they are likely to continue to be in high demand, at least among retailers, services, and restaurant businesses, for which credit-card sales constitute a large portion of their revenues. That said, it’s important for businesses to consider carefully the terms of an advance and to look for a reliable provider with appealing rates. Advances are not loans but purchases and sales of future income, which means that they are not bound by the laws that put caps on interest rates or regulate lenders. In other words, the merchant cash advance industry can be a dangerous playground for businesses that don’t choose a reliable provider with reasonable rates.