Your business can benefit immediately from a cash advance or online loan. Bypassing the time consuming procedures of a bank loan can oftentimes help you adhere to a faster timeline for your plans or can simply be the best solution that your business needs right now. However, dealing with the aftermath of a cash advance can cause more harm to your financial health than you previously expected.
We get it. Cash advances are the best on-hand problem solver whenever you have an issue you need to deal with quickly and effectively. They can also be a good investment point for when your business is ready to grow and extend. Requesting an online loan nowadays is a fast and accessible procedure and creditors usually provide the funds in a matter of days. Another important aspect is the fact that your credit score is not a determiner of your eligibility for that loan or advance. Basically, it’s easy money, with easy delivery. But is it really that easy? And how much does this actually cost in the long term? These are the main topics that we will cover in today’s article.
Cash advance companies, also known popularly as cash shops or MCAs, represent an important backbone of America’s current small business industry. With more than $19 billion funded yearly, merchant cash advance companies do not offer traditional loans, but rather offer a lump sum payment in exchange for a fixed percentage or your future sales and credit card income. The stipulations can seem just as easy as accessing them, with the majority of the advances having a fixed repayment amount over daily payments. However, paying daily towards a cash advance is not the best move for a business in a financial situation that requires such type of funding.
Let’s take a basic example. Your business needs a $10,000 cash advance for expanding and opening a new location. Your typical cash advance company will add on an approximate 50% interest on top of the amount borrowed, getting you to a total repayment amount of $15,000. Even though the interest is high, receiving the funds in a matter of days might make the high percentage worth the risk. As a purchase of future receivables, the company will likely stipulate in their contract a daily repayment of $150 over 100 days, which is roughly 5 months of business activity. At first glance, getting rid of a $10,000 loan in less than half a year is not such a bad idea, as those funds will be used to generate a bigger profit.
However, what’s important to consider is the fact that the cash advance will charge your business bank account the agreed upon $150 starting the next business day after they’ve deposited the funds in your account, which makes your use of the full amount of funding you received limited from the very beginning. This is further aggravated by the fact that many of these companies will also charge a processing or origination fee just for sending you the advance funds. Being such a small withdrawal, you might not feel the lack of those funds immediately, but once you have invested those funds towards your expansion plans or have used them for other needs, you will start to feel the effects of the daily withdrawals pretty fast. This is due to the fact that the cash advance will request the funds back regardless of whether your business is cashing in or not in a specific day. Basically, if your business generates only the minimum $150 in a day, you will end up with zero profit on that specific day or even worse, if you do not generate enough you’ll find yourself in the situation where your existing profit will be eaten up by the payments.
Leaving profit out of the equation for the moment, you will identify another disadvantage of daily repayments. With a consistent amount being constantly taken out of your bank account, your business will find it much more difficult to build up the cash flow needed to keep it’s activity ongoing. You will soon fall short of money to invest back into your stocks or basic needs, pay out your vendors in time, or respect rent deadlines, which might end up putting you into a position where you will need to weigh in which expenses are more important or more urgent. This is considered a financial hardship and, if effective measures aren’t taken quickly to address this hardship, it can drive your business towards an incapacity of performing at the same standards or, even worse, bankruptcy.
IS THERE AN ALTERNATIVE TO DAILY PAYMENTS?
Daily payments are not the only repayment method adopted by the various cash advance companies serving the market. With a little research done, you can easily find companies that offer weekly or even monthly payment options. A lower frequency might seem more appealing, as it does not slow down your cash flow as fast. However, it’s important to keep in mind that the lower the frequency is, the higher the repayment amount will be, as the cash advance company’s interest is to get their money back fast. Therefore, if you do choose to go with a weekly or monthly repayment schedule, you need to make sure that your business has enough to cover those payments by the time they are due, being much higher than the alternative. This might put you into a situation where there will be funds in your account, but you will not be able to use them towards business expenses that might be more important than covering these payments.
I HAVE ALREADY SIGNED FOR A CASH ADVANCE WITH DAILY PAYMENTS. HOW DO I GET OUT OF THEM?
If your business is already feeling the consequences of a cash advance, there’s no need to panic. A majority of business owners all over the US access these types of deals on a regular basis and still find ways to operate smoothly and manage their payments. The contract signed with the cash advance company might seem like it does not provide a lot of advantages for you, but there are different ways to turn the situation to your benefit and still stay within the stipulations.
Giving that you have signed a purchase of future receivables agreement with the company means that the percentages stipulated in your agreement are the key in this situation. Even if your contract stipulates a fixed amount on a daily basis, this represents an approximate equivalent of a specific percentage of the sales your business is going to generate in the months following the advance acceptance. This percentage is calculated as an average based on the income generated by your business in the months before accessing these funds. Although nobody can predict the future and know exactly how much your business will make in the 6 months after accepting these funds, cash advance companies have no other way than to use this method of determining your daily payments. In short, if your business is not generating enough revenue for the $150 daily payments to respect the percentage stipulated in the contract, your business has an advantage into getting the payments recalculated to better reflect your actual sales figures.
Another alternative for getting your cash flow back and still paying off your debt is to access the services of a debt relief company. As opposed to a cash advance, these companies do not offer additional funding, as this can only drag you down and stack your business with additional debts. Instead, through expert negotiation and industry knowledge, a debt relief company can represent your business and secure better terms for your existing cash advances, giving your business the breathing space needed to get it’s cash flow back. More than that, debt relief can also help you set the foundation for profit growth and business expansion without the need of alternative means of funding in the future.
Although they provide fast and effective funding, cash advance companies will always have their best interest as a priority. One way or another, they will ensure that the investments made into the small businesses they fund will pan out in the end to their advantage and bring in their profit. However, that doesn’t mean that this type of funding must harm your business in any way. If a cash advance is the only solution available for you, make sure you’ve done your research before and have chosen an offer that will benefit you as much as possible. And if your plans still don’t align, pick up the phone and give us a call. Our team of experts will guide you through our system and will ensure that your business will be back on its feet and ready to grow.
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