When dealing with non-traditional financing options, like a merchant cash advance, you need to understand what you’re giving and what you’re getting. So, while it may be boring and tedious, it is important to thoroughly read your merchant cash advance contract. Every provider is going to do things slightly differently. Make sure you know exactly what you are agreeing to. A good provider will be upfront about their contract terms, but some will try to sneak in hidden fees. Learn the four most common contract terms to be wary of, so you can avoid overpaying for your MCA.
Beware of These 4 Contract Terms
1. Origination Fee
Know the “Real” cost of funding. On top of the factor rate, some providers will try to include an origination fee in their merchant cash advance contracts. These fees can run anywhere from 2% or higher and are based on the amount of the advance. For example: if a merchant offered an advance with a factor rate of 112%, this would project the lender to pay back $1.12 for every dollar advanced. But if they also add a 3% origination fee, that would have the lender paying back $1.15 for every dollar advanced. For advances that exceed $100,000, this origination fee can end up being very costly!
2. Hidden Fees
Many people will simply rely on a sales pitch, as opposed to thoroughly reading through the merchant cash advance contract. This can lead to paying more than necessary in hidden fees. A merchant cash advance is pretty basic: a provider gives you money that you pay back through business sales. This means if you don’t get paid, neither does the provider. Notice the lack of extra fees? If a borrower tries to charge you extra, they are more than likely out to get your money.
Here are a few common hidden fees to look out for in your merchant cash advance contract:
Some providers try to charge a monthly “borrowers” fee. This is an extra charge for each month you don’t pay back your advance (on top of the already agreed upon factor rate and provider’s fee). Others will try to tack on a late, penalty, or daily default payment fee, which would charge extra, daily, for late or missed payments toward the advance. Steer clear of any providers who charge any kind of fees of this kind, as they are unnecessary given the nature of funding with a merchant cash advance.
Given that a merchant cash advance requires daily payments, often providers will also affix set-up, processing, or even daily payment fees. This means that they would charge you extra for the original transaction, as well as for each daily transaction made to pay back the amount advanced. In some cases, this can as much as double the actual cost of the originally agreed upon cost of the loan. The amount you agreed upon in the beginning is the price you should pay, no more – make sure to read your contract carefully before signing anything.
Some merchant cash advance contracts will include a clause that states you will have to immediately pay back the remaining balance of money borrowed, even under extenuating circumstances (like if your business closed down). If this is in your merchant cash advance contract, the provider is trying to gain the perks of a loan without the legal regulations that come with an actual loan. Don’t fall prey to these type of agreement – a merchant cash advance is NOT a loan, and should NOT be treated as one.
A flexible withholding rate means a provider is able to change the amount (percentage) they’re taking daily, typically without prior notice. This can be a scary thought, especially for businesses that go through slow seasons. This may unexpectedly cut into revenues and leave you with a sudden shortage of funds. A good merchant cash advance provider will give you a set withholding percentage rate that is calculated (and communicated from the beginning), to allow your business enough profit to stay afloat, even during unprofitable months.
3. Required access to you business bank account
There are very few companies that you want to have direct access to your business bank account, and a merchant cash advance provider is not one of them. A MCA provider with direct access to your business bank account has contractual permission to withdraw money without prior notification. In a day an age with such widespread cases of fraud, you never know if your information is completely safe. What if the funding company you choose hires an individual who turns out to be a scammer or a criminal? Are you willing to risk your business capital? If your business has a flexible withholding rate, this means the provider would be able to change how much they withdraw without telling you (meaning you will never be 100% sure what amount you will be charged or when).
4. Merchant account compatibility
Most merchant cash advances are established either directly through a merchant account provider or through that provider’s third-party affiliate. If a merchant cash advance provider cannot work with your merchant account provider or if they ask you to switch, be very careful. Although it is necessary for credit card processors to work with merchant cash advance providers to correctly route debit and credit card sales, it is the provider’s responsibility (not yours) to work out the method by which they integrate their services.
Find out more about the ins and outs of a merchant cash advance by reading our Merchant Cash Advance Buyer’s Guide.
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