Some small businesses rely on Merchant Cash Advances to help them through low-cash moments. These products come with substantial risk, however, and you should weigh your options carefully.

What Is a Merchant Cash Advance?

Merchant Cash Advances (MCAs) are quick infusions of cash to keep a business running in the short term. Businesses like food service and small retail ventures can find themselves short of cash because they take most of their payments on credit or debit cards. MCAs allow these businesses to acquire cash quickly, then pay it back right away from sales revenue. It’s like a payday loan for businesses.

What Are the Dangers of a Merchant Cash Advance?

Like payday loans, MCAs come with very high fees that can put small business owners in a bind. These products can spiral into a debt trap making it very difficult to pay back the loan. Some people are forced to file for bankruptcy in this case. An MCA is a last resort financing tool.

How Do You Repay a Merchant Cash Advance?

With a traditional loan, you make a monthly payment from your bank until the loan amount plus interest is paid. With an MCA, payments are made weekly or even daily until the obligation is paid off. The company takes the payments electronically. Fees are determined up front by a factor rate based on the merchant’s ability to pay the sum back. The factor rate is usually 1.2 to 1.5. This means that if the advance is for $50,000 with a factor rate of 1.4, you will pay $20,000 in fees plus the original $50,000. It usually takes between three and 12 months to pay off the MCA, although if sales are higher, it will go faster. There is also an option to pay a fixed amount instead of a percentage. The problem with this method is that if sales dip, you still have to pay the same amount.

Are There Any Advantages to Merchant Cash Advances?

Because they are so risky, MCAs are the last resort for getting through a cash flow problem, but there are a couple of upsides. For one thing, you can get them quickly without filling out a stack of paperwork. All you need are your daily receipts to show your income. Also, you don’t need collateral because MCAs are unsecured. So you don’t risk losing physical assets, although you will need to provide a personal guarantee to repay the funds.

If you find yourself in a cash-flow bind, you can get a Merchant Cash Advance and pay it off with your daily income. This is a risky proposition, however, and you should think very carefully before moving in that direction.