Merchant cash advance loans might seem like a great solution for businesses in need of immediate cash. But, these loans can often lead to a financial spiral that is hard to escape. If your business is feeling the pressure of financial distress, it’s crucial to explore sustainable solutions rather than quick fixes like merchant cash advance loans. At Newpoint Advisors Corporation, we offer proactive, strategic approaches to help businesses regain control over their finances and ensure long-term stability. Learn how you can avoid quick fixes for your finances, and set your business on a path to financial health.
What is a Merchant Cash Advance Loan?
A Merchant Cash Advance loan (MCA) is a type of financing where a business receives a sum of cash in exchange for a portion of its future sales. These loans are typically used by businesses that operate with regular credit card transactions. However, a Merchant Cash Advance isn’t a traditional bank loan. Instead, MCAs guarantee the cash advance with the borrowing business’s future revenue. Merchant cash advance loans are less limited in terms of lending laws and therefore charge top-dollar in fees to the borrowing business. This makes an MCA much more costly in the long run. Think of it as getting a credit card to pay off existing credit card debt—it might solve the problem momentarily, but it sets the stage for deeper financial issues down the line.
How Does an MCA Work?
Merchant Cash Advance loans are typically used to cover a cash flow gap. These are quick-fix solutions that can be costly for your business. Here’s how they work:
- Funding: You determine the amount of cash your business needs. Then the MCA financing company deposits the agreed-upon sum into your business bank account.
- Fees: Instead of traditional interest, MCAs typically use a factor rate. This rate is applied to the total money required in the advance. These rates vary from one lender to the next but can be anywhere from 1.1 to 1.5 and up. For example, a $100,000 advance with a factor rate of 1.5 means you’ll repay a total of $150,000.
- Additional Fees: Additional fees may include underwriting fees, administrative fees, and more. These fees can really add up increasing the cost of the merchant cash advance loan to your business.
- Repayment: Repayments can be deducted daily or weekly. The advance is settled once you’ve paid back the full amount plus the factor rate and any additional fees.
Why Do Businesses Seek a Merchant Cash Advance?
MCAs can be a very attractive solution to a stressful problem. Many businesses choose to pursue a merchant cash advance loan because it is a quick solution to a financial problem. However, with big pros, come big cons.
Pros:
- Easy approval: Because MCAs are not traditional business loans, they often have higher approval rates. This means that businesses are less worried about whether they will receive the loan at all.
- Fast: Merchant cash advances are fast. In as little as two business days, you may have the cash needed.
- Future Revenue: MCAs typically use future sales to guarantee repayment, meaning the business does not need to back the loan with other business collateral.
Cons:
- Repayment Schedule: MCAs are known for their aggressive repayment schedules. This could mean daily or weekly payments until the advance and fees are fully paid.
- Costly: Most conventional loans simply cost less than an MCA. This makes MCAs one of the most expensive ways to tide over your business.
- High Fees: Those fees add up! On top of the rates attached to the advance, most businesses that offer MCAs stack fees on top that increase the cost to the business substantially.
- No Credit Benefit: MCAs are not a traditional business loan. Because of this, they can not improve your credit score.
After decades of working with businesses in financial distress, we’ve seen that when a business opts for an MCA, they are often dealing with more significant financial issues. We highly recommend avoiding this quick fix, and instead focus on solving the root of your financial distress.
When to Seek Help from a Cash Flow Coach™
If your business is in the early stages of financial distress, it’s critical to take action before things worsen. Rather than turning to a merchant cash advance loan, consider consulting a Cash Flow Coach™. Instead of a band-aid style solution, you will develop a customized cash flow plan for your business. By using our unique planning tools you can regain control over your finances and avoid the pitfalls of high-cost financing options like MCAs.
Our coaches utilize our Cash Flow Launcher™. This is a user-friendly, 13-week cash flow forecast model designed to help businesses manage their cash flow effectively. It has been battle-tested and approved by financial institutions, providing a reliable solution for companies struggling with cash management. This low-cost, fixed-fee program focuses on generating cash from operations, ensuring that your business remains financially healthy.
When Does a Business Need Turnaround Services
If your business is already in the middle of financial distress, it’s time to consider more comprehensive solutions. We offer cost-effective Business Turnaround Services designed to improve financially underperforming businesses with revenues of $5-50 million. Our services include:
- 20-Day Proactive Assessment™: A quick and affordable evaluation of your financial situation, providing a clear roadmap for improvement.
- 100-Day Turnaround™: A detailed plan to get your business back on track, with clear deliverables and fixed costs.
- Turnaround Action Matrix Evaluation (TAME)™: An in-depth analysis of your business operations to identify areas for improvement.
Our turnaround services provide clarity and stability, helping you regain control of your business’s finances.
Continued Financial Distress: CXO and Capital Solutions
For businesses with long-term financial distress, you need to get creative. We put our best business minds to the task through our CXO services. We combine executive-level expertise in both data management and leadership, to deliver immediate, actionable insights that drive progress. This service provides tailored support to stabilize companies, control costs, and ensure sustainable growth. With a focus on deploying experienced C-Suite professionals, we offer interim management, consulting, and coaching for enterprises at risk.
If your business requires additional financing to overcome financial challenges, our Capital Solutions Group can assist with arranging, structuring, and closing transactions with potential financiers. We offer a variety of financing options, including business lines of credit, inventory financing, and equipment leasing, tailored to your specific needs.
When do you Need the TRAIL Program or Subchapter V
For businesses facing severe financial difficulties, Newpoint Advisors offers the TRAIL Program and services under Subchapter V bankruptcy. These services efficiently and effectively address the unique challenges of severe financial distress, helping your business navigate bankruptcy or liquidation while maximizing recovery and preserving opportunities and jobs.
Merchant Cash Advance loans may offer a quick solution, but they often lead to a cycle of debt that can be detrimental to your business’s long-term financial health. Instead of turning to high-cost financing options, consider proactive measures to improve cash flow and stabilize your business. Newpoint Advisors Corporation offers a range of solutions, from Cash Flow Coaching to Turnaround Services, CXO expertise, and Capital Solutions, to help you navigate financial challenges and secure a stable future for your business.
If your business is experiencing financial distress and you need help to regain control, contact Newpoint Advisors Corporation today. Our team of experts is ready to assist you with the right financial solutions to ensure your business’s success.
Want to learn more? Get in touch today!