Merchant Cash Advances: What You Must Know Before Jumping In
July 10, 2019
Last minute expenses that come at financially inconvenient moments don’t just happen to individuals, they happen to businesses, too. For a growing number of businesses – especially those with few if any cash reserves and maxed-out lines of credit – those surprise expenses can be disruptive to the life of the business. Think about a sudden breakdown in machinery for a small manufacturer or an industrial-size freezer on the blink for a restaurant – the cash for this type of expense is needed immediately to avoid down time and loss of revenue.
In these instances, some business owners elect to receive a Merchant Cash Advance (MCA). This unregulated cash advance industry has attracted a fair share of unscrupulous lenders and has been the undoing of businesses as well as the lives of the business owners. Extremely high borrowing costs, hidden conditions and questionable collection tactics are common themes. In December 2018, Bloomberg published an article about the industry and the harsh collection tactics of lenders that they said are from “a bygone era.”
What attracts some business owners to MCAs is that:
What should make business owners think twice – or three or four times – before signing on to an MCA is that:
Of note, though the MCA industry first blossomed with restaurants that might need that freezer right away and not have cash reserves, it has expanded and affected small and medium size businesses in all industries. Calvin Blount and Tracy Eden of The Commercial Finance Group (an asset-based lender) recent told us that they have seen businesses at the $30 million revenue level taking on MCAs to meet their short-term cash needs. In 2017, the MCA industry had extended about $15 billion in credit and it is growing at a rapid rate. (Bloomberg, November 2018).
It is not unusual, nor is it shameful, to need cash and not have immediate access to it – for whatever the reason may be. There are financing options out there that present a solution with less risk for borrowers, such as factoring (“selling” your accounts receivable in exchange for cash) or asset-based lending (using your company’s assets as collateral for a loan, which you can then use to grow your business). As a business owner, you must exercise due caution when seeking capital to fund unexpected expenses and growth – even when under pressure, take the time to understand who the lender really is, what the terms of your loan or “advance” are and the ramifications of that to your business on a day to day basis, and whether it may affect any preexisting agreement with other lenders.
As accountants and advisors to our clients, we invite them to reach out to us to discuss their options and let us help them analyze their situation to determine the best solution for their funding needs. Please contact us a 404-874-6244 or fill on the contact form below.
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR
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