When your business is in trouble, you’re focused on getting money fast, so you might consider a business cash advance. This financing option has a lot of advantages, but it can also have some hidden dangers that you might not be aware of. Before you decide to use it to get cash flow for your business, it is advisable to inform yourself on the pros and cons of this option and look into the dangers you might want to avoid.
Using A Business Merchant Cash Advance As A Long-Term Loan
The problem with a lot of shorter term loans, whether they're personal loans or business loans, is that people become dependent on the income and they get stuck in a vicious circle. They ask for an advance or a payday loan, pay it back, only for them to get another one immediately after that, because they've run out of money again.
Why is it dangerous?
First of all, because this is no way to live, or do business. If your business does not make enough money to sustain itself and it relies on constant cash advances, then you have a bigger financial problem than you think.
Second, relying on a merchant cash advance for businesses becomes extremely expensive very quickly. This sort of financial aid is designed to be used in case of emergency or as a one-time or occasional thing. It is in no way meant to be a long-term loan. The amount you repay is 20% or 30% higher than the one you borrow, and in the long-term, that kind of loss is just not sustainable and not worth it.
Being Told How To Run Your Business By The Merchant Cash Advance Provider
When you take money from someone, they will have a certain degree of control over you. When it comes to merchant cash advances, that control is even tighter and more influential, because the company has access to your accounts. Their nose is in your business, whether you like it or not and they will have a say in how you run it.
Why is it dangerous?
While you’re not in any danger of literally losing your business, you will lose the liberty of doing business the way you want to. For all its flexibility when it comes to repayment terms, a cash advance for small businesses can bring rigidity in other aspects of your business.
For example, some companies will forbid you from discouraging your clients to pay by credit card. In order to get their money back, your company needs to have a healthy amount of credit card transactions per day/month, etc.; it’s one of the things they look for when you apply, because that’s where they get their money from. It is in their interest for as many of your clients as possible to pay by credit card, so you’re not allowed to prefer cash.
In addition, it is likely that you will be unable to change the company you use for credit card processing for the entire time you repay the loan. In fact, some merchant cash advance providers will request that you change the credit card processing company in order to be approved for the advance, in the first place. That can be incredibly inconvenient, and a little intrusive.
Defaulting On The Business Merchant Cash Advance
Obviously, the biggest fear you have when you borrow money is that you won’t be able to repay what you owe. At the end of the day, taking any kind of loan is a massive risk, because even if you think you can afford it now, anything can happen in the meantime, rendering you unable to repay. It’s a very real fear that may come true at any moment, and you need a backup plan in case it does.
Why is it dangerous?
Depending on what kind of loan you got, defaulting on your loan can be more or less dangerous. Of course, in the case of secured loans, you run the risk of losing that asset entirely, but a merchant cash advance is unsecured, so what have you got to lose?
You don’t actually have the option to not pay the merchant cash advance company, because they have access to your account and take the money themselves, which is intrusive in itself. So in order to not be able to afford to pay, you would have to make no sales and/or income, or no credit card income at all. As I mentioned, that can be dangerous if your contract states that you are not allowed to discourage your clients from paying with their credit cards.
Moreover, if you can't pay them, it means the business is going badly, and you might be heading for bankruptcy. The last thing you need is the MCA provider harassing you about the loan you can't afford to repay. Your debt will ultimately end up in some collection agency’s database, which will damage your credit history even more than it already is. If you think, for any reason, that you may be unable to repay the entire amount, it’s recommended not to take it at all.
In conclusion, while a merchant cash advance can have numerous advantages for you and your business, there are also dangers you need to be aware of, take into account, and avoid at all cost. You should also educate yourself on all aspects of a financing option like this before you make a decision.
Perhaps by this time, you're asking yourself "Should I Get A Loan Or Business Cash Advance?”. Read our information on the topic and decide which option is best. If you would like to apply for a cash advance for your business, read the government page about loans at Gov.Uk, where the information is comprehensive and nonbiased.You can also read more in our guide on quick cash injections using cash advances