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5 Reasons Why You Need to Refinance Your Merchant Cash Advance

Sarita Harbour

Sarita Harbour

Sarita Harbour is a Small Business & Entrepreneurship Columnist at Fundera and a freelance writer and entrepreneur specializing in business and personal finance. A former financial advisor, Sarita has over a decade of experience in banking. Her work appears online at sites such as Forbes, Investopedia, Yahoo!, Capital One Spark Business IQ, and Business News Daily. Connect with Sarita on Twitter @saritawrites.
Sarita Harbour

Maybe it was the fastest way to get some much-needed money for your business’s cash flow, or maybe it was the only way you could borrow at the time. Whatever the case, one thing is for sure: your merchant cash advance (MCA) isn’t ideal. Here are 5 key points on why and how you might want to consider refinancing your merchant cash advance.

1. Merchant Cash Advances Are Expensive

A merchant cash advance is just borrowing money against your credit card receivables. A lender gives you a lump sum, and in return you pay back a percentage of your daily credit card sales until you’ve paid back the lump sum, plus a fee based on a cash advance is just borrowing money against your credit card receivables. A lender gives you a lump sum, and in return you pay back a percentage of your daily credit card sales until you’ve paid back the lump sum, plus a fee based on a factor rate ranging anywhere from 1.1 to 1.5. But don’t be fooled: factor rates aren’t the same as Annual Percentage Rate (APRs), and you could end up with what amounts to an annual interest rate of a whopping 100% or more.

2. Short-Term MCAs = High Daily/Weekly Payments

Depending on the percentage of your daily credit card sales sent to the lender, you could pay off your cash advance in less than a year’s time… Which sounds pretty good, except for the fact that there’s no benefit to doing so. Yes, the cash infusion that merchant cash advance loans provide to your business is supposed to help your cash flow situation. But high percentage repayment terms, where a lender (like Swift Capital) takes a percentage of your daily credit card sales, can be hard to keep up with when you also struggle to meet your regular monthly expenses and grow your business.

3. Merchant Cash Advances Won’t Help Your Credit

Though lack of credit might have led you to try a merchant cash advance in the first place, this type of business financing won’t help you build your business credit—which you should be working on in order to increase your chances of getting approved for better credit in the future. Merchant cash advance companies can’t report to business credit bureaus because they aren’t structured as lenders, according to a 2015 article published by the Federal Reserve Bank of San Francisco.

4. The Never-Ending Merchant Cash Advance Story

A merchant cash advance should be a last-resort short-term one-time solution. In case that’s unclear: don’t rely on ’em unless you absolutely need to. However, because they’re typically set up to get paid off in under a year with high repayment rates, struggling borrowers might fall into a cycle of renewal after renewal—similar to the way payday loans work in the personal finance realm. And in the long run, this isn’t going to help your finances or your business. It’ll just make your hole that must harder to climb out of. 

5. An Online Business Loan Could Be Cheaper

Even though online business loans might be more expensive than bank loans, they’re still probably significantly cheaper than a merchant cash advance. Whether you’re looking for a term loan, a line of credit, or something else, the online lending industry has plenty of options that you can shop around for. You have the opportunity to refinance that merchant cash advance, too, so at least you won’t get stuck in short-term and expensive debt.

How You Can Refinance Your MCA

Start with an online term loan and make it clear that your loan purpose is to refinance debt. While you’re at it, take note of the monthly payments you’d make on a slightly longer term loan—maybe a three-year term. Chances are, they’re lower than what you’re currently making on your merchant cash advance, giving your business some breathing room with a smoother cash flow and the space to deal with your debt.

Also, take a look at whether your potential lender reports to the small business credit bureaus. This could be an opportunity to boost your credit rating by making all of your payments in full, every time, so your business will qualify for lower rates and better terms in the future.

Online business lenders have much faster turnaround times than traditional banks do, so don’t be surprised if you get approved or receive your funds in less than a week. Use this money to pay off your merchant cash advance, and try not to borrow against your credit cards again. Instead, focus on establishing or rebuilding your business credit, so you won’t be caught in a dangerous situation next time.

There are plenty of options when it comes to refinancing your merchant cash advance, including an online business loan. Do your research, and don’t be afraid to shop around for the best rates and terms that suit your particular business situation. And don’t delay—the sooner you refinance, the sooner you’ll get out of an expensive and limiting cycle of debt.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Sarita Harbour

Sarita Harbour

Sarita Harbour is a Small Business & Entrepreneurship Columnist at Fundera and a freelance writer and entrepreneur specializing in business and personal finance. A former financial advisor, Sarita has over a decade of experience in banking. Her work appears online at sites such as Forbes, Investopedia, Yahoo!, Capital One Spark Business IQ, and Business News Daily. Connect with Sarita on Twitter @saritawrites.
Sarita Harbour

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