When it comes to Merchant Cash Advances, we’ve now covered the good, the bad . . . and now its time for the . . . you guessed it – the ugly.
In my opinion, the nastiest part of the Merchant Cash Advance industry stems from the fact it is unregulated. (No, I’m not a huge advocate for more government regulation) – but when used incorrectly or fraudulently, this product has the ability to put merchants out of business.
It really comes down to cash flow – and, more importantly, the predictability of that cash flow. In the current economy, margins are tighter than ever. Therefore, if a merchant enters into an agreement that opens the door to unpredictable fluctuations in retrieval amounts (the percentage of sales recouped on a daily basis to repay the outstanding advance) – it creates a recipe for disaster.
Here are a couple of pointers to keep in mind before signing on the dotted line for a Merchant Cash Advance:
1.) Make sure the funding company spells out clearly in their contract that they CAN NOT change the retrieval percentage at any time during the repayment period.
To illustrate: If you agree to a $10,000 advance with a payback of $13,500 over a projected 7 month turn with a retrieval percentage of 15% – that funding company should be unable, by contract, to increase that 15% if the payback period extends past 7 months. Some companies reserve the right to do this - and their unfortunate clients could find that 50% of their daily processing receipts are seized vs. the 15% they had agreed upon up front.
2.) Select a company that won’t approve a funding that exceeds a certain percentage of your GROSS sales (not just your credit card processing volumes). This is a biggie – and the better, more reputable firms in the industry strictly adhere to this principle. The typical ceiling rate is 8.99% of gross sales – meaning that approximately $91 of every $100 your business generates will remain in your company’s coffers. If a company does not express concern about this – shop around until you find one who does. You will probably get less money from a firm who follows this guideline, but you won’t be put in a position where you are giving up 20 or 30% of your total gross sales to repay the advance.
3.) DO NOT, under any circumstances, agree to pay any origination fees, closing costs, application fees, statement fees (related to the advance) or any other miscellaneous fees or add ons when applying for a cash advance. Did I state that strongly enough? There are some less-than-ethical sales agents out there who are more than willing to pad their own pocket at your expense. Any type of fee like the ones noted above will go STRAIGHT into the sales rep pocket, folks. I’ve seen agents add originiation fees of 10% onto the Cash Advance amount … so on a $50k funding – they add ANOTHER $5,000 on top of the the already expensive cost of the money itself. These agents then receive their full commission (typically 5 – 10% of the entire payback amount), plus the $5,000 they charged in made-up fees.
I’ll say it again – this product is NOT a loan. It is a true sale – ALL of the above fees are related to loans and don’t (or should’t) apply in the Cash Advance world. Any agent who tries to tell you this is just the way it is – is not telling the truth. The more reputable funding companies will not tolerate this practice from their reps if they find out about it.
Run, don’t walk, away from any agent who tries to tell you otherwise.
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