When it comes in the form of a small business loan, debt can be beneficial to keeping your business functioning and growing. But, as a small business owner, you’re likely also aware of the bad kind of debt, which can be debilitating to businesses and their individual owners.
And, as you also already know, there are lots of ways to find yourself in debt. For some small business owners, one of these ways is by rushing into a merchant cash advance. Financing companies offer these types of loans for fast access to capital, but they can be extremely expensive. And, since MCA providers take a chunk out of a company’s daily profit, they can inflict major cash-flow issues, leaving businesses unable to keep themselves afloat.
If you’ve found yourself in serious debt because of a merchant cash advance, don’t lose hope. Many business owners who find themselves in this position have overleveraged their debt to receive a merchant cash advance loan.
We’ll tell you more about merchant cash advances, why they can be harmful to your business, and how to relieve any debt these types of loans may have caused.
Before we dive into why merchant cash advance debt can be harmful to your business, let’s look at just what a merchant cash advance is.
A merchant cash advance is a loan that your business pays back through customer credit card purchases. Financing companies provide a lump sum of cash, which they calculate according to your business’s credit card receivables. In return, that financing company takes a percentage of your credit card sales.
Typically, MCA providers automatically withdraw a percentage of the credit card payments made at your business at the end of each day. They’ll continue to pull these daily amounts from your business until the lump sum is paid back.
Small business owners might consider merchant cash advances because they’re generally easier to qualify for than other types of small business loans. Plus, you can see that lump sum of cash in your bank account fast.
Some business debt can be a great way to grow your business—but too much debt will only hurt your business, with no end in sight or ability to pay it all off. In particular, merchant cash advances can quickly land you in debt.
There are some very specific drawbacks of excessive business debt, especially the debt acquired through merchant cash advance loans.
There are no two ways around it: Merchant cash advance debt is expensive.
In addition to their repayment terms, merchant cash advances loans charge a fee. The fee is based on factoring, and typically ranges between 1.1 and 1.5. Don’t be fooled by those small numbers, though, because factor rates aren’t the same as APRs.
If a lender quotes you a factor rate, you’ll multiply the factor rate by the loan amount to find out the total amount you owe. All the interest is included in that factor rate amount. APRs, on the other hand, are used when a loan accrues interest.
So, with a merchant cash advance, your equivalent interest rate might end up as high as 100% per year. This charge is what makes it so easy for your business to find itself overleveraged by merchant cash advance debt.
Paying off your merchant cash advance in less than a year may sound like a great deal, but the repetitive payments might not be worth the trade off. As well, there’s no benefit to paying off a merchant cash advance quickly: The higher your credit card sales, the more money you’re losing to the MCA provider that day—and the more deeply you’re going to feel the effects of that debt.
Many financing companies also take out payments automatically each night, meaning the cash is gone before you even see it. This makes repayment easy, but it can also cause you an additional cash-flow problem.
Many businesses turn to merchant cash advances when they think they’re out of other loan options. If you truly have no other options, a merchant cash advance will work, since many MCA providers accept bad credit.
But if you’re trying to build your business credit score and history, a merchant cash advance won’t help you: Merchant cash advance lenders don’t report your repayment history to the bureaus—and on-time repayment is one of the best ways to improve your business credit score.
On the other hand, one of the benefits of a merchant cash advance is that it won’t hurt your credit history, either. You’ll have to assess whether this is harmful or not for your business.
Remember this when considering a merchant cash advance: This should be a one-time, short-term, last-resort loan option. Consider all loan options prior to accepting a merchant cash advance.
If you’re reading this article you may have found out why: The never-ending merchant cash advance cycle.
A merchant cash advance can be what you need to fix a cash-flow problem. But paying it off daily might put you right back into a cash-flow problem and unable to grow your business.
This might inspire you to take out another merchant cash advance—and, before you know it, you’re caught in a vicious debt cycle.
When looking for a business loan, know that there are many cheaper options than a merchant cash advance. If you have any way of avoiding taking out another merchant cash advance loan, take it.
Another merchant cash advance loan will only throw your business deeper into debt. We’ll show you multiple options on how to find merchant cash advance debt relief.
Paying off merchant cash advance debt isn’t easy for every business. And paying off that debt can restrict your cash flow and impede your ability to grow your business.
But if you find yourself with too much debt from one or more merchant cash advance loans, it’s time to take back your control over your business and get out of debt.
And there are many ways to get out of merchant cash advance debt and make your business operable again. Let’s examine each one and find which is right for your business.
Replacing your merchant cash advance debt with a term loan is one of the ways to refinance your merchant cash advance debt.
Term loans are a good options for business debt consolidation loans for many businesses, because these loans carry much more favorable terms than MCAs. More specifically, they have lower interest rates, longer repayment periods (which makes it easier to manage your cash flow), and monthly, not daily, loan payments.
If you decide to go the term-loan route, make sure you let the lender know that you’re using the funds to refinance merchant cash advance debt. Some lenders put restrictions on how their funds may be used, so it’s important to make sure you’re aware of the stipulations of any term loan you apply for.
An asset-backed loan is guaranteed by your business’s assets, which means that if you don’t pay back the loan, the bank or lender can collect your assets to recoup the debt. There are many different kinds of collateral, including property, inventory, personal guarantees, and blanket liens.
Collateralized loans are less risky to lenders, since they have a built-in safety net in case a borrower defaults. That makes these loans a little easier to qualify for than unsecured business loans, so businesses with limited financial histories might have an easier time securing these types of loans if they’re willing to put up collateral.
Asset-backed loans also offer lower interest rates and longer repayment terms than merchant cash advances, so you’re almost always better off securing an asset-backed loan than a merchant cash advance from the get-go. But you can also use an asset-backed loan to refinance your merchant cash advance debt.
Another benefit of asset-backed loans is that your ability to repay it will be reflected on your credit history, since many lenders report to the credit bureaus. So, if you find an asset-backed loan that works for your business, you’ll be paying off your debt more affordably and raising your credit score (assuming you pay your loan bills in full and on time, of course!).
If you’re in debt because of a merchant cash advance, or if you’re dealing with your business’s first merchant cash advance, you might be eligible to renegotiate your loan terms.
When renegotiating your merchant cash advance debt, you’ll need to show the financing company that you’re able to repay your debt according to the loan’s new terms. If your business is seeing higher credit card sales or more purchases in general, this can be a great tool for renegotiating your merchant cash advance debt.
The more evidence you can show the lender that your business is doing well—and can reliably pay back your loan—the more likely they’ll be to negotiate with you and give you better repayment terms.
If you are able to renegotiate your merchant cash advance debt, you still might want to combine this solution with another type of loan. Renegotiating might make repayment easier, but you could make it even easier and more affordable if you also refinance your debt using a long-term loan.
If your merchant cash advance debt is from multiple merchant cash advances, you might want to consider debt consolidation.
Debt consolidation means taking out a single loan to repay all of your existing debt. The major benefit of debt consolidation is that it can lower your average or overall repayment interest.
Plus, making multiple payments daily or monthly to different lenders can get confusing, making it easy to miss a payment and get charged late fees. But with a debt consolidation loan, you only need to keep track of one loan.
So, debt consolidation simplifies your life and makes it easier to repay your merchant cash advance debt. But if you decide to consolidate your merchant cash advance debt, it’s important to work with a lender who understands debt consolidation. Not every loan product can be used for debt consolidation, so make sure to let your lender know your intended use of this new loan.
Overall, the goal of debt consolidation is to make repayment cheaper and easier. And to ensure that you’re appropriately consolidating, only work with lenders who have experience in managing merchant cash advance debt.
If your business is simply facing too much merchant cash advance debt, you can consider filing for bankruptcy.
Bankruptcy should be reserved as a last possible resort, but it can also mean the difference between saving and ruining your business. Bankruptcy will negatively affect your credit report, but it also might keep your business from completely failing.
There are three options when filing for business bankruptcy: chapter 11, 7, or 13. Which chapter of business bankruptcy you file for depends on your ownership structure, and what you want to happen to your business afterward.
If you think your business needs to go down this route, be sure to consult with a business attorney and accountant.
Merchant cash advances can prove tempting to small business owners in need of fast cash, especially for those businesses that make much of their money through credit card transactions. But, in reality, the negatives of merchant cash advances can far outweigh the positives. Namely, they can land small business owners in a cycle of debt that they can’t seem to get out of.
If you’ve found yourself with too much debt from merchant cash advance loans, you’re allowed to worry. But you don’t worry too much: There are 5 main options out there to help you handle your debt:
Whether you choose to consolidate your debt, take out a term loan to repay the merchant cash advance debt, or file for bankruptcy, know there’s an option that’s right for your business.
And although getting out of merchant cash advance debt can seem difficult, any of these options can save your business money, improve your cash flow, and help you make your small business flourish again.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.