This differs from a traditional “amortizing” small-business loan, in which early repayment would result in less interest paid
There’s no benefit to repaying early. Since you have to repay a fixed amount of fees no matter what, you get no interest savings from early repayment. It also means that if you decide to refinance, you’ll still have to pay all of the agreed-upon fees, and you may also get hit with an early repayment penalty.
There’s no federal oversight. The merchant cash advance industry is not subject to federal regulation because MCAs are structured as commercial transactions, not loans. Instead, they are regulated by the Uniform Commercial Code in each state, as opposed to banking laws such as the Truth in Lending Act, according to a report by First Data.
Your credit score may be pulled. Although MCAs typically are an option for business owners with bad credit, that doesn’t mean the MCA provider won’t at least check your credit score during the application process. Background credit checks are a common requirement for MCA providers, Goldin says – but if the provider’s credit inquiry results in a hard credit check, it can hurt your credit score.
There’s a debt-cycle danger. The speed and ease of MCAs can put you into a debt cycle, especially if you don’t qualify for other types of financing. Borrowers may find themselves in need of another advance soon after taking on their first one due to the extremely high costs and frequency of repayments of MCAs, which can cause cash-flow problems. A daily payment of hundreds of dollars, for example, could put a strain on the cash flow of many small businesses and put them at risk of default.
Contracts can be confusing. The costs and repayment structure of https://paydayloanstennessee.com/cities/brentwood/ MCAs can make them difficult to understand. Contracts are often loaded with unfamiliar terms, such as specified percentage (the percent you repay out of credit card sales), purchase price (the amount you receive) and receipts purchased amount (total payback amount). MCA providers do not provide APRs, which makes it impossible to compare with other financing products. You may also be required to sign a legal document called a confession of judgment, which forfeits your right to defend yourself if the company takes you to court.
Alternatives to MCAs
Before turning to a merchant cash advance, small-business owners should seek out alternatives. If lack of collateral or a need for speed make getting a traditional loan difficult, online lenders offer small-business loans with competitive APRs and repayment terms.
For businesses with poor credit
Business owners with poor personal credit can try online lenders OnDeck and Kabbage for financing. The upper end of APRs for these lenders is 99%. But for borrowers with a narrow range of choices, they offer some advantages over MCAs.
OnDeck’s business term loans are a less pricey and more flexible alternative to MCAs. Unlike MCA providers, the company reports your payment activity to the business credit bureaus, so it gives you the opportunity to build strong business credit , which can help you get a lower-cost business loan in the future.
With access to up to $500,000, repayment periods stretching to three years and repayments made daily or weekly, loans from Onent purchases or hiring new employees. Besides meeting the minimum qualifications, borrowers cannot be on the company’s restricted industries list.
Kabbage is among the options for business loans for bad credit , as the lender requires a minimum credit score of 560 to qualify. Kabbage provides $2,000 to $250,000 with shorter repayment terms than OnDeck. It’s a better option for short-term working capital needs than for an expansion.