There are many downsides to merchant cash advances. A merchant cash advance, or MCA, is a type of financing agreement for businesses. An MCA company purchases a portion of a business’s future revenue in exchange for a lump sum. That money is often repaid with a percentage of the business’ credit card sales, what’s known as the hold-back percentage. These types of agreements are generally short-term contracts. However, they have their downsides. The government does not regulate merchant cash advances because the government doesn’t consider MCAs loans. This lack of regulation results in many merchants being cheated with usurious deals.
MCA companies make their money by essentially betting that the merchants will not be able to pay their advances back, and they structure the contracts to ensure that this will happen. Because MCAs are more expensive than loans, companies generally only use them in times of desperation. MCAs often have incredibly high APR rates (typically ranging from 30% to 100%), making it very difficult for merchants to pay them back. Struggling to pay back the amount lent, merchants may take out a second and third MCA, putting the company at risk of taking on an unsustainable amount of debt. It’s worth noting that this type of cash infusion does not build business credit.
Another one of the downsides of merchant cash advances is that the contracts are purposefully complicated and challenging to understand. MCAs don’t require collateral, which seems beneficial for the merchant, but in reality, it is very predatory. MCA contracts often require the merchant to sign a confession of judgement When written into the contract, confessions of judgment lead to merchants waiving the right to defend themselves in court as the contract allows the provider to obtain a legal judgment against them without giving any notice. Confessions of judgment often enable MCA companies to deplete a business’s bank account.
Although the daily payments are usually based on credit card sales, most MCA lenders have an affixed amount that they recover from merchants even when merchants cannot pay due to a lack of revenue. This places a strain on the daily cash flow for the merchant.
Merchants are personally responsible for making MCA payments, even when the business cannot pay. Business owners’ lives can be turned upside down when they default. This makes MCAs risky not just for your business, but for your personal finances.
If you took a merchant cash advance and find the terms to be unconscionable, and as a result, are unable to pay, suit and judgment may be the resulting outcome. At Frank, Frank, Goldstein and Nager, we can handle defense of the suit and, if appropriate, move to vacate the judgment. Contact Frank, Frank, Goldstein and Nager to learn more about your options.
Interesting article