Merchant Cash Advances Aren’t Perfect – Here’s Why

We get it – making ends meet can be tough month after month. Sometimes all it takes is a few unexpected expenses and you’re suddenly not sure how you’re going to be able to pay your bills. When things get lean you may be tempted to look into other ways of bringing money into your business, including merchant cash advances. Think again – merchant cash advances may sound great, but they are more expensive in the long run.

Understanding Merchant Cash Advances

Simply put, a merchant cash advance borrows money against your business’s future credit card sales. When you apply for a merchant cash advance, the provider will look at your past sales and determine how much of an advance they are willing to give you. You are basically accepting less funding down the road in order to have more money now – and that can be a very dangerous game.

How Much Do Merchant Cash Advances Cost?

Most cash advances are paid back through the holding of a certain percentage of your daily batches. This is usually around 15% but can reach up to 40% or even more in some cases. This means that if you bring in $1000 in sales you can expect to pay an average of $150 of that toward your merchant cash advance, and maybe up to $400 or more. Think of these as similar to wage garnishments – until your loan, the interest, and any additional processing fees are paid off you won’t be getting full funding for your credit card batches.

The Dangers of Merchant Cash Advances

As you can see, the cost of using merchant cash advances to fund your business can be extremely high. There are, however, other risks beyond the obvious ones. If you happen to default on your loan, for example, your processor will be required to hold even more of your daily batches to pay it off – up to and including the entire batch. With no money flowing into your bank account, you’ll be in even worse shape than before you took out the loan. Plus, the interest rate on merchant cash advances is usually quite high. You’ll pay a significant penalty over time in order to access funds now, and that might not be worth it.

Finding a Partner You Trust

It’s important to find a credit card processing partner who will help you understand the funding choices available. If you’re not confident that you could ask your credit card processor for advice on merchant cash advances and get a straight answer, it’s time to find another processor. At 360 Payments, we pride ourselves on educating our customers and making sure they feel empowered to make smart financial decisions. Give us a call at 1-855-360-0360 or drop us a line on our website. We’re ready to help.

PS – Get business funding ideas here.

PPS – Here’s how to launch your startup on a shoestring budget.

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