One of the options small businesses may turn to for financing immediate cash flow needs is a merchant cash advance (MCA). However, these cash advances can set off a devastating cycle of borrowing which can have catastrophic consequences for a business owner.
While a Merchant Cash Advance, (MCA) can help a business owner secure immediate financing, there are several pitfalls they should be aware of before opting for this type of financing. First, most MCAs are approved based on debit and credit card payments over a specific period. Secondarily, they can be very costly, with APRs (annual percentage rates) as high as triple digits.
MCAs Work But at What Cost?
While in the past all MCAs based advances strictly on debit and credit card transactions, more vendors are offering more flexible options which include all sales. Business owners would submit an application, the vendor will make a proposal to offer a certain amount of cash in advance and payment arrangement will be made. However, there’s more to this than meets the eye.
When using an MCA, the repayment terms typically mean the business owner will pay the advance through daily or weekly payments plus fees. The amount paid is generally based on various factors including the amount borrowed, plus the fees, plus the term of the MCA. Repayment is based on the amount of debit and credit card sales and is debited automatically from those sales. The predicament most business owners face is they have no control over the length of time it may take to repay the MCA — since it is based on new sales, this could mean it takes longer to pay the full amount. Remember, the longer repayment takes, the higher the APR. The other concern is the contracts may be confusing meaning your client may be signing something they do not fully understand.
Why Invoice Factoring Makes More Sense
For nearly every business owner, invoice factoring is a better option. There are several reasons for this including:
- Easy to understand — contracts for accounts receivable financing are written in a manner which is clear to the customer. Business owners will be able to clearly review their terms and understand exactly what they are paying for fees.
- Not based on future sales — rather than taking a chance on lower sales in the future, meaning longer repayment times, your clients are getting an advance on existing sales. This is good news because it means APRs are not higher, and they are not dependent on monies not yet earned to get the cash they need.
- Different type of automatic payment — payments for factored invoice are made by the end client; the one who is paying the invoice. That means your client never has to worry about a weekly or monthly payment to pay back the advance they have received.
- No impact on other sales — the only funds used to pay off the advance your client has received is the payment on the invoice they have factored. This makes sense because should there come a time when they have a need for additional cash, they can select other client’s invoices to factor.
While MCAs may be valuable for some clients, at Capstone, we believe invoice factoring is a more stable, safer option for nearly every client. Since repayment does not impact future sales, it also allows your clients more flexibility.
Capstone understands every business is different and may have different financing needs. That’s one of the many reasons we are here to offer a customized financial solution to help your client meet their immediate cash flow needs without impeding their future sales. Contact our offices today and let us see if we can help you find the best solution for your client. You can reach one of our highly-trained representatives at (212) 755-3636, you can contact us by email at or you can fill out our simple to use online contact form. Let us help you drive your client’s growth and success.
