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Drawbacks of a merchant cash advance

BY Value Capital Funding

August 21, 2023

What are the Drawbacks of a Merchant Cash Advance?

What are the Drawbacks of a Merchant Cash Advance?

As a business owner seeking trustworthy financing alternatives, you understand the appeal of merchant cash advances (MCAs) for quick funding. However, it’s crucial for you to have a clear understanding of the potential drawbacks of a Merchant Cash Advance before making a decision.

In this blog post, we will discuss the drawbacks of MCAs, including the high cost and daily or weekly repayment structure. You can make an informed comparison with traditional business loans by learning about these drawbacks, such as factor rates, annual percentage rate (APR), and the impact on your cash flow.

You will also learn about the traditional financing options provided by Value Capital Funding that can help address your concerns, instead of relying solely on MCA debt.

An Insight Into the Drawbacks of Merchant Cash Advances

Merchant Cash Advances has gained popularity as a quick financing option for businesses. However, despite their convenience, MCAs come with several significant drawbacks that businesses should carefully consider before opting for this type of financing, these include:

  • High Costs – Instead of traditional interest rates, MCAs charge a factor rate, which is a multiplier applied to the borrowed amount. Factor rates can be as high as 1.2 to 1.5 times the original amount—resulting in a substantial cost increase over time.
  • Daily or Weekly Payments – MCA repayments are usually made on a daily or weekly basis, deducted directly from the business’s sales or bank account. This deduction can further strain the cash flow, especially during slow business periods.
  • Renewal Trap – Some MCA providers may entice businesses into a renewal trap, offering to refinance the existing advance with additional funds. However, each renewal comes with new fees and higher factor rates, trapping businesses in a cycle of debt.
  • Impact on Credit Profile – MCA providers do not report to credit bureaus, so timely repayments do not positively impact a business’s credit profile. On the other hand, missed or delayed payments can lead to a negative effect on the credit score.

The High Cost of Merchant Cash Advances: Factor Rates and APR

One of the primary drawbacks of merchant cash advances is their high cost, which can significantly impact the financial health of your business. The cost is often expressed through factor rates, which can range from 1.2 to 1.5 times the funding amount.

Any financing offer that doesn’t quote you a reasonable annual percentage rate, means it is usually more costly, so you need to have your business antennae up & be on full alert.

These rates directly influence the total repayment amount, increasing the financial burden on your business. It’s equally important to consider the annual percentage rate associated with MCAs, as it provides a comprehensive view of the true cost of borrowing. The fact that most MCA companies don’t quote you an APR, should be very unsettling.

Daily or Weekly Repayments: A Burden on Cash Flow

Merchant cash advances typically employ a repayment structure that involves daily or weekly deductions from your business’s bank accounts. While this arrangement may initially appear convenient, it can ultimately place a serious burden on your cash flow.

The frequent repayments mean a consistent outflow of funds, which can strain your business’s finances, especially during slower periods. It is crucial to evaluate whether your business can comfortably meet these daily or weekly repayment obligations without jeopardizing its day-to-day operations.

To make a well-informed decision about whether MCAs are appropriate for your business, you need to carefully assess their impact on your cash flow.

Compare Merchant Cash Advances with Traditional Business Loans

When evaluating financing options for your business, it’s important to compare Merchant Cash Advances with traditional business loans. While MCAs offer quick funding with minimal paperwork, traditional loans provide a distinct set of advantages.

Traditional loans, like FDIC Bank Term Loans and Lines of Credit, often come with lower interest rates, longer repayment terms, and monthly repayment structures. To make an informed decision for your business’s financial goals and long-term sustainability, it’s important to evaluate the benefits and drawbacks of Merchant Cash Advances versus traditional loans.

Explore Value Capital Funding’s MCA Debt Refinancing Solutions Today!

At Value Capital Funding, we understand the drawbacks of Merchant Cash Advances and the financial challenges they can pose for businesses. That’s why we offer specialized MCA debt refinancing solutions to help businesses overcome the limitations of MCAs and achieve greater financial stability.

Our MCA debt refinancing services provide businesses with the opportunity to reduce financing costs, extend repayment terms, and gain better control over their cash flow. With competitive rates and a quick approval process, our FDIC Bank Term Loans and FDIC Lines of Credit offer businesses a reliable and secure source of capital to fuel growth and success.

Don’t let the drawbacks of Merchant Cash Advances hold your business back. Explore Value Capital Funding’s MCA debt refinancing solutions today, and take the first step towards financial empowerment and long-term prosperity. Our expert team is here to guide you through the process and find the best financing options that suit your business needs.

Unlock the potential of MCA debt refinancing with Value Capital Funding and secure a brighter future for your business, contact us at 800-944-6280 today!

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