What is a Merchant Cash Advance Loan and How Does it Work?
Merchant cash advance or business cash advance loans – which came into being over the past 10 years – are gaining in popularity because they offer a relatively hassle-free means for business owners to get loans during a time of tight credit and economic difficulty. The way the loans work is that the borrower puts up no real collateral, does not make any down payment, and usually does not pay any upfront costs or application and closing transaction fees. Instead the lender asks for proof that the business is legitimate and viable and that the business owner handles a robust volume of credit card charges from its clients and customers. There is no fixed repayment plan involving amortized monthly installments, either, because the loan is paid back by giving a percentage of future credit card sales revenues to the lender.
So if you own a restaurant, for example, where most of your patrons use credit cards to pay for their meals, a merchant cash advance lender might agree to give you a loan of $50,000 in exchange for repayment totaling $70,000 that will be taken over the next year or two as a portion or cut of your credit card sales. The interest rate, as this example illustrates, is extremely high when compared to traditional bank loans, and that is the main downside of the business cash advance loan for a borrower. But those who use this kind of loan have typically been turned down by all other traditional lenders so they turn to this easy but high-interest method of borrowing as a loan of last resort.
Because there is no fixed repayment schedule and the repayment is contingent upon taking a percentage of credit card revenues, the borrower will repay more in a profitable month and less when business is slow. That works out well for businesses struggling in the recession, and it also means that the merchant cash advance loan industry is not regulated under legal mandates and oversight like banks and other conventional lenders are. That lack of regulation – coupled with interest rates that go as high as 300 percent in some cases – makes these loans riskier and much more controversial, but business owners who use them say they have few other options since banks have already denied their loan applications.
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