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If you’re looking for financing options for your small business, you might have come across something called “credit card processing loans.” They could help you get the funds you need to keep your business functioning. But there are also some big risks you should know about before borrowing any money. 

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So before you agree to any credit card processing loans — or any other type of business debt — learn more about how they work. 

Credit Card Processing Loans Definition

A credit card processing loan is another name for what’s officially known as a merchant cash advance (MCA). They’re sometimes called credit card processing loans because businesses are granted funds for a portion of future credit card sales. 

However, these aren’t actually loans at all. With a traditional business loan, you receive a lump sum of capital to pay for certain business expenses. You then pay back that money in regular monthly installments with a fixed interest rate over several years. 

With a merchant cash advance, you also receive upfront funding. However, the MCA lender essentially purchases a portion of your future sales. After you receive the advance, the MCA lender will withdraw a certain portion of your business sales weekly or even daily until the debt is repaid (with interest).

How Do Credit Card Processing Loans, AKA Merchant Cash Advances Work?

When you apply for a merchant cash advance, the lender will examine how your business is currently performing. Then, they will look at your bank statements to decide whether your sales are strong enough to receive financing. If you’re approved, the MCA lender will determine the amount you’re eligible to borrow, plus a factor rate.

The factor rate is similar to an interest rate. Typically, it ranges from 1.1 to 1.5 and is based on the risk profile of your business (the higher the risk, the higher the factor rate). To determine the cost of your MCA, multiply the advance amount by the factor rate. For example, if you receive a merchant cash advance of $100,000 and your factor rate is 1.2, you’d need to repay $120,000. Keep in mind that some MCA lenders also charge certain administrative fees on top of the factor rate.

When it comes to repaying the funds, you’ll agree on a certain percentage of business sales or revenue toward your debt. Generally, it’s around 5% to 20%. That means if your sales increase, so do your payments. The same is true if they go down. With an ACH merchant cash advance, on the other hand, payments are fixed. The MCA provider withdraws funds weekly or daily through your payments processor or business bank account.

Is Borrowing a Merchant Cash Advance a Good Idea?

One of the reasons MCAs are an attractive option among small business owners is that approval is based on the performance of the business and not the owner’s personal credit. The process is usually very fast; it may only take one to two business days between when you apply and when you receive funding. 

Even so, there are some big downsides to merchant cash advances. For one, they’re quite expensive compared to other forms of financing. The repayment term is usually very short (it can be just a few months to a year or two) compared to the cost. When expressed as an annual percentage rate, the cost of an MCA can be as high as 350%.

MCA contracts may also contain some questionable provisions since they aren’t subject to the same regulations as business loans. For instance, your contract might include a confession of judgment. If you stop making payments, this clause allows the MCA lender to obtain a judgment against you without notifying you ahead of the court proceedings.

It’s also common for MCA contracts to include a stipulation that allows them to file lawsuits in New York — even if your business is not located there. But, again, New York’s laws tend to favor MCA companies. 

And though your personal credit score may not be a major factor in getting approved for an MCA, you may be required to make a personal guarantee. You’re personally liable for paying back the advance if the business can’t. In addition, your assets, such as your home, bank accounts, and other property, could be at risk if you default. 

Alternatives to Credit Card Processing Loans/Merchant Cash Advances

Borrowing a merchant cash advance isn’t necessarily a bad move. However, they’re more of a Band-Aid for short-term cash flow problems and not an excellent option for long-term financing needs. So if you’re exploring different types of business financing and credit, also consider some of these other options:

  • Term business loan: Offered by traditional banks and credit unions, a term loan provides a lump-sum loan that you pay in regular installments. The interest rate is usually fixed, and the repayment term is around five years. 
  • SBA loans: The Small Business Administration guarantees these loans and they’re provided by SBA-approved lenders. Since the government backs them, SBA loans tend to be fairly affordable. 
  • A business line of credit: Similar to a credit card, a line of credit gives you a certain amount that you can borrow against as needed. The balance accumulates interest, and you must make monthly payments toward it.
  • Invoice factoring: Some lenders specialize in purchasing your outstanding receivables. They pay you an upfront percentage of your outstanding invoices and then directly collect from your clients. You then receive what you’re owed, minus interest.

Having Trouble With a Merchant Cash Advance?

It’s important to carefully weigh your options before committing to a credit card processing loan, a.k.a. merchant cash advance. If you are currently facing issues with paying a merchant cash advance or your lender has taken action against you, know that there are many options, including debt settlement. 

Heavy soliciting is a common tactic among MCA companies, along with many promises. Be aware that there are many legalities only an experienced attorney should be resolving for you with MCA lawsuits and UCC notices sent from MCA’s matters. Tayne Law Group is an experienced law firm that handles merchant cash advances in danger of default or that have defaulted. We’ve been successfully assisting business owners with their MCA debt for years. Call us for a free, no-obligation consultation on strategies that make sense for your business at (866) 890-7337. Or fill out our short contact form to receive a call back about how we can help. We will never share your information, and all communications are confidential. 

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