This year has been a less-than-fun rollercoaster in the world of finance.
Well, good news on that front — no more recession bogeyman lurking under the bed, at least that’s what the Fed declared as they raised rates again last week. Doesn’t mean more interest rate hikes aren’t ahead or that inflation’s fully cooled, but things appear to be balancing out.
Even with this silver lining, there are still some darker clouds hanging around when it comes to borrowing for your biz. It doesn’t mean you don’t have options, just that things are a bit tougher right now in terms of borrowing to get some extra cash.
That’s one reason I’ve been talking more and more about loan alternatives with my Indianapolis clients. Because, even if it’s difficult, it doesn’t mean you should give up on finding new ways to expand your business and make improvements. You just might need to be a little more creative.
I’ve got some ideas on that, but they’ll also depend on your particular situation. If you want some guidance on these matters, I’m here for you, :
Today I’d like to give you some details on a loan alternative that might help you circumvent the difficulties with borrowing right now, something called a business cash advance…
Business Cash Advance: A Loan Alternative for Indianapolis Businesses
“Put not your trust in money, but put your money in trust.” ― Oliver Wendell Holmes
When your Marion County company needs a little extra change, the first option you consider is probably loans: an infusion of cash that you pay back (if your credit’s good enough to get one in the first place).
But a loan isn’t the only option for a cash infusion, though. There’s another option that comes with its own advantages… as well as disadvantages: a business cash advance (or a merchant cash advance, MCA for short).
Let’s take a look and see if this is a finance option for your biz and if it is, what you’ll need to prepare for if you decide to take one.
Banking on your future
With a business cash advance (or MCA in this case), a financing company advances you a lump-sum amount of cash against your future revenue at, ostensibly, 0% interest. You agree on a fixed payback amount (aka the Purchased Amount) and have to immediately begin making frequent repayments — daily or weekly — until the advance is paid off.
There’s no loan involved. The MCA company is taking a portion of your future credit and debit sales and charging you what’s called “a factor rate.” Let’s say you take a grand in advance and it comes with a 1.5 factor rate. The total amount you’ll have to repay is 1,000 dollars times 1.5, or 1,500 dollars.
Obviously, these deals aren’t for every business; for some, they could be downright dangerous. But let’s look at the pros and cons, anyway.
Yay for no regulations
Credit is no factor. MCA companies are relatively unregulated, and one of the few advantages of that is they can make advances in unconventional ways — including ignoring credit ratings (though many MCA companies don’t). This can open a flow of capital if you’ve had trouble getting mainstream loans.
You get cash fast. Unfettered by most regs, MCA companies can get you money in days. That’s a real boon if you have a deadline and the investment you want the money for will improve your bottom line to cover the business cash advance and its factor rate. (Be certain it will…)
They get their cash fast, too. Just last year, the Federal Trade Commission said this in a news release about defendants (who used “deceptive and illegal means to seize assets,” by the way) in one business financing case: “Typically, a merchant cash advance company will make daily withdrawals from the business’s bank account until the obligation has been met.”
That means you won’t just get cash quickly, but you’ll likely have to shell it back out quickly, as well.
There is, in fact, “interest.” Let’s say you have to pay off a 10,000-dollar advance at a factor rate of 1.3, or 13 grand. Let’s say the MCA company gives you three months to pay it back. That’s a 229% interest rate. Even if you stretch the payments to a year (12 months), that’s still 57% interest. Fees for missing a payment can also be steep, and there’s no benefit at all to you if you pay the debt off early.
The future is unsure. Your advance is against your future sales. If those sales don’t happen, you still have to repay the amount. Defaulting is considered a breach of contract with the MCA company, opening the door to liens and collections on not just your business assets but potentially your personal ones as well.
Let’s look at some actual MCA companies. With Credibly and Rapid Finance, you can get advances of up to the mid-six figures, but you have to meet minimums in time of operation, revenue, and credit score (conditions similar to many MCAs recently). With CAN Capital, you can get an advance of just four figures, though there is an administrative fee and the factor rate can hit 1.48. Libertas Funding offers advances of up to a mil, but only says its factor rates “vary.”
If you get into an MCA and find it chewing up too much of your revenue — or, worse, you’re taking out more MCAs to pay off previous ones — there are mitigation methods.
- Ask your MCA company to lower your repayment amount. They might go for this to avoid the hassle of suing or sicking collections on you. MCA contracts also are required to include a clause that allows you to reset the payment amount if you need to.
- Take out a loan and pay off the MCA. The loan terms might be better for your company in the long run. MCAs can, however, interfere with a company’s ability to subsequently get a traditional loan.
- File for bankruptcy. Your last resort… but it could buy you time.
Please be careful before you ink one of these deals, and don’t go at it without having someone in your corner to crank the numbers and make sure whatever agreement you land will actually benefit you in the long run. Remember, we’re always here to offer support. Reach out any time:
Cheering on you and your business,
John R. “Rusty” Helms, C.P.A., CGMA