Merchant Cash Advances and Factoring: Good or Bad Ideas?

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Your business needs cash, but for a number of reasons you don’t think a traditional loan is right for you. But then you hear about something that doesn’t get a lot of publicity: selling your future receivables (sometimes called merchant cash advances) or invoice factoring. What are these types of loans and what are the potential dangers of obtaining them?

Interest in your receivables

A merchant cash advance lends you money based on your past debts. You pay the money you earn in the future as you earn the money. There is usually no fixed monthly repayment amount because the repayment is based on the money your business earns on a daily basis.

In most cases, these lenders will want large amounts of your business financial information to see what your business has been up to in the past. If the repayment is based on future sales, lenders want to make sure you have a solid history of past sales.

Often times, lenders will want a lot of information, including bank statements, contracts, balance sheets, and other financial information. They may also require that you deposit your credit card receivables into a joint bank account that the lender has control over, allowing them to see what your business is earning on a daily basis.

The good and the bad

The good news for many of these companies is that you will generally be funded relatively quickly, much faster than a traditional lender. Also, since these lenders are betting on your future debts and taking a percentage of it, they don’t really care about your credit rating or your history.

But there are serious drawbacks to these lenders. Many will withdraw from your bank account on a daily basis, either as a regular draw or based on the percentage of your daily deposits. The percentage they will take often equates to an APR that would otherwise be considered a user. In fact, there is some debate as to whether these business “interest” in your future income is the same as the traditional interest charged on a loan. If so, their interest rates are illegal and usurious.

You certainly have very little financial flexibility with these loans as they withdraw from your account daily. This can leave your business in cash flow situations, unlike a regular loan, where you can wait 30 days until your next payment.

Invoice factoring

Invoice factoring is also calculated on your past invoices. These are basically advances on your business accounts receivable. The lender will pay you immediately when you invoice a customer, which means you will get paid immediately, no matter how long the customer takes to pay.

Interest rates with invoice factoring tend to be more reasonable, and lenders often won’t require daily withdrawals to pay off the loan.

Call the West Palm Beach commercial litigation attorneys at Pike & Lustig to make sure your business isn’t in trouble and the contracts it signs don’t put it at risk.


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