4 Things You Need to Know Before Entering a Deal
When the federal government shut down on October 1, 2013, small businesses around the country felt the impact. Overnight, small-business loan approvals grounded to a halt as the SBA was forced to reduce staff to skeleton crews, incapable of handling the application requests. As a result, more and more small businesses were forced to look elsewhere for the funds they desperately needed, and for some, merchant cash advances helped pull their businesses back from the brink.
While merchant cash advances have long been reliable sources of funding for companies that accept credit cards, over the years, they have become tainted as being a predatory type of lending. Traditionally carrying high interest rates and an assortment of fees, these loans are often scrutinized, despite their conveniences. As a result, here are four things you need to keep in mind before entering a deal with a merchant for a cash advance.
#1 – Read the Contract Very Carefully Before Signing
Merchant cash advances are often called predatory lending, but they can’t do what you don’t agree to, and everything the merchant can legally do is outlined in the contract. Take the time and read over the entire contract so you know exactly what you are in for before you sign the agreement. If you are unsure about anything, then have your lawyer read the contract before you sign. In either case, the moment you sign, both you and the merchant are bound by the contract.
#2 – Get Familiar With the Payment Plan
How much percentage of each credit card transaction will the merchant take to put toward the loan balance? What is the interest rate? Is it fixed or variable? How much in total will your cash advance cost you in the end? Finding out the answers to these and other questions will help you fully understand what you are committing to, and whether or not it really makes financial sense for your business.
#3 – Understand the Fee Structure
Merchant cash advances are notorious for their high interest rates and numerous fees. In most cases, borrowers are subjected to fees from both the broker and the lender, and they can add up fast. All fees should be clearly outlined in the contract, but even still, inquire about any other additional fees before putting pen to paper.
#4 – Compare Merchants for the Best Deal
If you already have a credit card merchant, then your options may be limited, but if possible, compare merchants to see who can give you the best deal on your cash advance. You may be able to switch merchants, but before doing so, always check your contract to see if there are any early termination fees or other penalties for changing providers before the contract’s time-frame is up.
While they may not be perfect, merchant cash advances offer a very quick and reliable source of funding that can help businesses get to where they need to be when other more traditional types of funding are unavailable. The key to making this a successful and positive experience is to fully understand the terms of the loan and each party’s responsibilities prior to agreeing to the contract.
Photo Credit: Taber Andrew Bain, Flickr.