Payday loans are risky little things, aren’t they? For those who don’t know what payday loans are, here’s a short introduction: Payday loans are paycheck-based, short-term loans that provide consumers with quick cash at a fixed interest rate for a limited period. However, those fixed interest rates are always higher than regular interest rates.
As for business payday loans, they don’t technically exist. Payday loans are primarily consumer-oriented and not business-oriented. However, Merchant Cash Advances (MCA) have sometimes been called business payday loans.
What Is a Merchant Cash Advance (MCA)?
Merchant cash advance companies allow small businesses to sell future credit card sales in return for a lump sum of cash.
A merchant cash advance has previously been used by businesses that make most of their money through credit and debit card sales, like restaurants or shops. Now, merchant cash advances can also be used by other businesses that don’t rely too much on credit card or debit card sales.
As opposed to payday loans, where they directly deduct the money you owe from your next paycheck, MCAs take credit from your business credit card on a daily or weekly basis until the amount is repaid.
There are two methods to pay a merchant cash advance:
Traditional Merchant Cash Advance
When you apply for a traditional MCA, you receive the sum of the loan upfront. To repay the loan, a fixed percentage of your sales is deducted on a daily or weekly basis. The amount deducted is based on the number of sales you make, and the more sales you make, the more amount is debited to the MCA organization until the loan, plus fees, is repaid.
ACH Merchant Cash Advance
Through ACH cash transfer, you also get your cash upfront, and your advance, plus fees, are also deducted on a daily or weekly basis. Except that your fixed percentage is cut directly from your company’s checking account with the help of an Automated Clearing House (ACH). In this method, the amount debited remains the same.
Drawbacks of Merchant Cash Advances
As quick and easy as MCAs can be, they are very binding. There are some positive points to MCAs, but there are a lot of negative points as well. Here are a few:
- May not be suitable for small businesses – If you assist a customer by taking cash and not credit or debit card payments, then a portion of the sale is not added to the debt repayment program with the MCA firm. It can be taken as a breach of contract, and litigation may ensue. This means MCAs are applicable only if your company takes credit or debit card payments. MCAs are not suitable for small businesses that accept cash payments.
- Higher APR – The Annual Percentage Rate (APR) on MCA is high. Depending on your credit score, a factor rate of 1.2% to 1.5% is added to your advance. Your APR can range from 60% to 101%; it can also go up to 200%, even if it is only for a few months. So, you owe more than you borrowed.
- Lots of rules and regulations – As opposed to other loans, MCAs have a lot of rules and regulations that the borrower needs to follow. If not followed correctly, it can be called a breach of contract.
- Does not affect your credit score – If you think that your credit score will improve by repaying and fulfilling the contract, then no, that will not happen.
How Are Payday Loans Different from Merchant Cash Advances?
From a consumer’s point of view, payday loans and MCAs have more similarities than differences. For example, both of them provide quick access to money, even if you have a bad credit score.
The most significant difference here would be the percentage added over the payment. Payday loans may charge about 12% to 30% interest rate calculated over 14 days. Whereas, in MCAs, the total amount is calculated by factoring over 1.2% to 1.5% of the amount, which is a lot more than the amount you’ll have to pay if you take out a payday loan.
Payday loans are convenient when you need a small amount of cash quickly. As for MCAs, the amount you take out is much larger than a payday loan.
Unlike MCAs, you can get payday loan relief quite easily. Getting out of an MCA can be tedious with rigid rules and contracts.
Alternatives to Merchant Cash Advances That Are Most Effective
Suppose you need quick access to cash for your business. In that case, you should avoid such “business payday loans,” which may seem appealing, but can impede daily cash flow and potentially drive you into a cycle of costly business debt.
Here are a few affordable alternative ways that may help you:
Invoice Financing
Invoice finance is a quick company loan. It allows business owners to finance invoices. The invoice financing is secured by the unpaid bills used as collateral. By funding you, the lender takes less risk. Invoice financing is cheaper than payday loans.
Equipment Loans
Equipment loans are ideal for purchasing vehicles, machines, or computers. In this situation, the equipment serves as collateral for the loan, allowing small business owners to borrow up to 100% of the cost of the equipment from the lender.
SBA Loans
SBA loans are often the best type of financing for businesses that want low rates, long terms, and small fees. These loans are provided by lenders who use the SBA loan program to help them. Enhancement gives the lender a promise: If the borrower doesn’t pay back their loan, the government will cover some of the SBA lender’s costs. With rates starting at 6% and terms that can last up to 25 years, an SBA loan is the best way to get money for your business instead of getting a merchant cash advance.
Conclusion
In some situations, merchant cash advances can be helpful, but they have a lot of risk factors. It is best to avoid payday loans and MCAs; all of them are debt traps. It is better to look at some alternatives before taking up an MCA. Gather all the information needed, take your time, read the fine print and then take the next step.
short url:
