Merits and Demerits of Merchant Cash Advances
Merchant cash advances are normally utilized for emergency expenditures in a business. Businesses that can generate stable card sales/transactions but cannot access small business loans or revolving lines of credit can benefit from MCAs. MCA can be utilized for different purposes in the business such as overhead costs, salaries and wages, payments to suppliers, and other unforeseen expenses.
Merits of MCA
Speed: The speed at which an MCA is approved and funds advanced is a major reason why businesses go for this type of financing. MCAs ensure prompt payments to creditors.
Unsecured/No Collateral: Usually, MCA is a non-recourse to the personal assets of the business owner. The lenders cannot lay claim to the personal assets of the business owner in case of a payment default.
Flexible: The terms of an MCA are flexible since repayment can fluctuate depending on the levels of sales. It is unlike the fixed loan terms of other financing options that require interest payments despite the circumstances. Therefore, MCAs will help protect your cash flows and enable the growth of your business.
Demerits of MCA
Costly: MCA is a costly financing option since the factoring rate paid to a lender is significantly higher than the interest rates charged on other types of loans.
Credit Score: Lenders conduct a hard credit check on borrowers which may lower their credit scores. However, repaying the MCA has no impact on your credit score.
No Incentives for Early Repayment: the factoring rate charges on an MCA s the exact fee that has to be repaid. That means that the business has no incentive to pay early and get interest savings. For some MCA lenders, there is a prepayment penalty to discourage early payments.
Debt Cycle: The high cost of MCAs and the direct cuts on sales could lead to cash flow challenges for your business. The business runs into the risk of getting into a debt cycle as it tries to repay existing MCAs.
Limited Regulations: The MCA is not classified as a loan and that means this financing option is not subject to stringent regulations that lenders who charge interest must satisfy.