Be Wary Of These Very Expensive Types Of Loans

Banks are still being haunted by their own shadows after the 2007-2008 financial collapse. Thus, they refuse outright to lend to small business owners who experience perennial cash flow gaps. Left out to dry, small business owners turn to alternative lenders to obtain quick and easy cash to keep the ball rolling.

Here, we’ll analyze why you should be wary of some types of loans and point you to other lending options you can look into.

Merchant Cash Advances (MCAs)

Merchant cash advances are “payday loans” for businesses. An MCA company upfronts you a cash amount that you repay daily, weekly, or monthly with a percentage of future credit sales. They’re very expensive, come with hidden fees, and APRs can easily skyrocket to triple digits.

Why MCAs are attractive to small businesses

Merchant cash advances put on a facade of a good lending option. They offer cash quickly to business owners with poor credit without the need for collateral backing. Rather than fixed monthly payments, they have a seemingly easy repayment process –daily or weekly deductions directly from sales. Again, their fees aren’t expressed in percentages but use clever factor rates of 1.2 to 1.5 to determine fees.

Why MCAs are a very expensive form of financing

Despite the lure and appealing nature of MCAs, they’re among the most expensive financing options available. Here’s why you may want to steer clear of these types of loans:

High APRS

MCAs don’t have standard borrowing rates. Average annual percentage rates hover between 40%-120% but can go as high as 400%! Small business loans usually have APRs of less than 10%. Although credit cards have higher rates, they aren’t anywhere near what you’ll get with an MCA.

The catch is, you won’t see MCA APRs in black and white as you would with other types of loans. They are hidden with complicated factor rates of between 1.2 and 1.5. Due to the lack of Federal regulation, there’s little transparency in disclosing fees.

Very Expensive financing options

Let’s say you take a cash advance of 30,000 to be paid daily within 180 days with a factor rate of 1.4. You’ll end up paying $42,000. That’s a total interest of $1,2000. It’s very expensive! Unless you make exorbitant profits, the cost of the loan becomes more than the value it brings into your business.

The cost of borrowing with an MCA loan eats into your daily profits. When you’re done repaying the loan, your business will not have grown, and you may end up worse than you started. Again, MCAs offer short repayment periods of 3 to 12 months. If sales are low, it may take longer to repay, and the lender can add a fee of 5-10% of the loan amount.

A borrowing cycle trap

Merchant cash advances can easily get you into a borrowing cycle trap. Their predatory APRs make it hard for you to retain enough cash flow to run your business operation. Due to short repayment cycles, you’ll struggle to keep enough cash on hand. At the end of the month, you may not have enough money to cover payroll, pay rent, and utility bills.

Left with no option, you’ll be forced to go for another MCA funding round. That’s how businesses lose control and sink into debt.

A better option for MCAs

While MCAs can offer a quick solution to cash flow when you run out of options, they’re very expensive and can be a death trap for your business.

The best alternative to an MCA is a small business loan. Small business loans are cheaper, have a simple application process, and you’ll receive your money in a matter of days. Unlike MCAs, small business loans won’t sink you in debt. For instance, Camino Financial offers small business loans at favorable terms and flexible payment periods within 2-10 days.

The bottom line is, you’re far better off funding your business with a small business loan than an MCA.

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