Stricter lending policies and increased regulations are making big banks more reluctant to offer loans to small companies. That is causing many small businesses to turn to merchant cash advances as a quick, easy way to get funding for development or expansion of their business endeavors. However it is important to be wary of the different organizations out there that offer these services, as their rates, terms, and credibility can vary greatly, and there are always fraudulent fronts that are looking to take advantage of those desperate to get funds.
The first thing to understand is that a merchant cash advance is not a loan. therefore the company offering this service should not be talking about interest rates. They also shouldn’t require any collateral against the funds being offered to you. Rather these financial institutions are supposed to earn money by taking a percentage of your monthly credit and debit card sales, which will be automatically deducted from your account.
Another red flag to look for are merchant cash advance companies that charge up front fees for processing an application. While they may require proof of your cash flow to determine whether you will be able to pay them back, and may even need references including contact information from your landlord in order to check your standing in the community and the viability of your business, the process of applying for these services should be free of charge.
It is also important to understand the terminology that is used in these organizations. Often a merchant cash advance company will be called a factoring service provider. That is in reference to the fact that they are purchasing an accounts receivable loan from you, for which they will charge 14% - 40% of any debit and credit card sales that are received. However they must use the term “business cash advance” when referring to these conditions.
Other good practices for preventing merchant cash advance fraud include checking the company out with the Better Business Bureau, and doing an internet search for negative mentions of them in online forums. You should also ask as many questions as possible, and if you are all unsure about the scrupulous nature of the institution that you are getting involved with then you should avoid the deal altogether.
There are several personal steps that you can take to avoid being wiped out by entering one of these agreements. Make sure that you understand all of the fees and percentage rates that are being posited by the organization in question. Then take the time to do the math, and ensure that you will not be crippled by the transaction fees being charged to such an extent that you will not be able to cover daily expenses. You should also review the contract that they offer carefully, and make certain that the language through is clear, and not ambiguous in any way, so that you don’t run into a legal problem down the line.