Here are a few tips to consider when entering a merchant cash advance agreement:
1. Read the contract – Always, and I repeat, always fully read the entire contract including the fine print. As business owners, you are very busy, but do not sign anything until you have read the contracts and fully understand everything stipulated. Ask your merchant cash advance provider these questions, but always confirm by reading the contracts. This is good idea not only for a merchant cash advance, but also a good rule for any contract that you sign in life. If there are any questions in the contract, ask your merchant cash advance provider, and then ask your lawyer to confirm.
2. Understand the program – Ensure that you understand exactly how much you are paying back to the lender, and what percentage the lender will take from your credit card receivables. Make sure that this percentage is consistent with business performance, i.e. if you drop below a certain value for Visa/MasterCard sales a month that the cash advance provider won’t take a higher percentage of receivables. If the advance is variable, then understand the risk involved.
3. Fees – Often there are fees attached to the merchant cash advance. These fees can be charged by both a direct lender, and also by a broker. Many merchant cash advance providers will charge fees on the UCC filing, switching processors, Lockbox account setup, service fees etc. Ask the merchant cash advance provider if there are any additional fees. Again, these fees should be outlined in the contract
4. No attached collateral – A merchant cash advance is NOT a business loan. It is actually a purchase and sales agreement. This is why merchant cash advance companies can pretty much charge whatever “interest rate” they want for the money. As such, it is generally accepted that in the industry there is no collateral attached to the advance. Make sure that there are no variables – i.e. minimum payments, consequences if failure to make payments etc. Ensure that there is no collateral attached. I have seen a few contracts from companies that contain stipulations about
appropriating the merchant’s property if there is failure to make
payment or if the business fails. If there is an additional collateral addendum and
stipulations, make sure that you understand all of them.
5. Do your homework! – Inquire with multiple companies about obtaining a merchant cash advance. Do not submit paperwork to too many companies, as too many credit inquiries will lower your credit score, and can possibly scare other cash advance companies from working with you. Read forums about the industry and about the companies. You will be surprised how much information you will find on the internet about cash advance companies. There is no shortage of companies out there, but understand which company you are dealing with. Are they a broker? Are they a direct-lender? Don’t take the salesman’s word for it – do the research yourself.
nice post. thanks.