If your company does a considerable amount of its business in credit card and debit card sales, the chances are that you’ve already heard about merchant cash advances. If you aren’t familiar with MCAs, though, they are in essence a type of loan available exclusively to businesses (usually merchants or vendors) that accept credit or debit cards.
These types of loans are especially common for restaurants and retail stores. If such a business had a major expense they had to cover—whether for new equipment, inventory, or the like—they could apply for an MCA instead of a traditional bank loan. If approved, the MCA would be delivered in a lump sum amount, same as a traditional loan.
The difference with a merchant cash advance is that, instead of making monthly payments to cover the loan and interest, the business would make smaller daily payments. These payments wouldn’t be in the form of checks, but of automated transfers. They also wouldn’t be paid at fixed amounts, but would vary depending on the company’s credit and debit card receipts for that day. The lender would essentially take a daily percentage of the credit/debit card sales and would put that money toward paying off the loan and interest.
The Double Fee Problem
Merchant cash advances are convenient for vendors because they automate the loan repayment process. Business owners don’t have to remember to pay a bill every month because their bill is being paid daily, directly out of their sales. Merchants with high credit card sales can also pay off their loan surprisingly quickly with this method.
The problem with MCAs is that some lenders charge their clients “double fees” if and when an additional loan is required. Say you take out a merchant cash advance to finance a purchase of a new dishwasher for your restaurant. You are well on your way to paying off the loan when the stove and oven range breaks down. You can’t do business without replacing the equipment, and you can’t replace the equipment without a loan.
So long as you have paid your original loan down to 50% or less of the starting balance, your lender should allow you to refinance or apply for a second merchant cash advance. Some lenders, though, require you to use a new loan to pay off the balance of your old loan—rather than treating the loans as separate financing agreements. In other words, the loan will be bigger than what you need for your new equipment because you have to get a loan to cover the old loan, plus the extra money for your stove. You will pay fees on the entire loan, though—even the money that is being used to cover the old loan. Since you already paid fees on the original loan amount, this arrangement essentially means that you are paying the same fees twice on the original loan.
Dodging the Scam
The most obvious piece of advice is to avoid taking out a second merchant cash advance until after you have paid off the first. As the situation outlined above shows, though, there are situations where an emergency can force you into requesting a second loan. When that happens, you are at the mercy of your lender and their policies for paying off the original loan.
As such, before you accept a merchant cash advance through a lender, you should ask the lender what their policy would be in the case of a double-loan situation. Would you be expected to pay off the first loan with the second loan, thereby facing double fees? Or would you simply receive a second MCA loan where you would only be expected to pay fees on the new money? Making sure you are working with a lender whose policies align more with the latter option can save your company a fortune in the case of an emergency loan need.