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The Downsides of Getting a Merchant Cash Advance (MCA)

As a business owner, wouldn’t it be great to have access to immediate capital even if you might not have the best credit score? There is a solution for you, called a merchant cash advance. But be advised these cash advances come with some hefty downfalls.

All businesses need working capital to be able to continue doing business, that doesn’t mean the easiest solution is the best idea. In reality, merchant cash advance loans always end up costing more than a traditional business loan.

Keep reading to learn about the risks associated with them and what you should use instead.

What is a Merchant Cash Advance (MCA)?

A merchant cash advance is an advance on working capital in exchange for a percentage of future sales. These types of advances are unregulated by the government and carry a heavy risk.

Like any small business, when money gets low, you look for any solution to get back on track. And the worst part is lenders know this and may try to take advantage of struggling entrepreneurs.

Merchant cash advances are only a short term solution and usually end up costing you more money in the long run. There are better types of funding to use like AR financing instead of MCA’s. But in some instances, it may be a last resort option.

High APR

One of the biggest downsides of a merchant cash advance is that they usually have some pretty expensive fees.

Most MCA’s are set up based on future sales and are usually paid back either daily, or monthly, depending on the rate. So the more that you make, the higher the APR gets, and can likely lead to paying back more than a traditional loan. Sometimes the interest rate gets higher than 300%.

In one business’s case, they were given an advance of almost $24,000, the payments were $500 a day, and this went on for 76 days. The total came to $37,500 in repayments. That’s about a 346% interest rate.

Typical small business loans average about 8-20% interest rates. For more information on a small business loan, check out this link.

Short Term Solution

Another major problem with merchant cash advances is that they can hurt you in the long run. They sound like a great idea when you are low on capital, but with the high-interest rates associated with them, they could end up burying you further.

It is not uncommon for people taking out MCA’s to have to take out multiple merchant cash advances. Borrowers do this so they are able to pay back their previous advance, which is a very risky situation. If your cash flow doesn’t improve, you will get buried trying to pay back the ridiculously high interest.

If you don’t keep up with the payments, the issuer may sue you or your business for a breach of contract. This will only lead you further into debt and in some worst case scenario’s, filing bankruptcy.

MCA’s will also not help your credit, but can potentially hurt it. It may be a stipulation for the lender to check your credit, resulting in a hit on your credit score.

Merchant Cash Advance Loans are Unregulated

Unlike other types of loans, MCA’s are unregulated by the government leaving borrowers in a bad situation. They may be presented in a certain way to make it seem like it is a beneficial loan, but in reality, it is the lender who benefits the most.

Many times the contract for a merchant cash advance can be confusing, leaving the borrowers vulnerable. This is what leads the merchant to high-interest rates and hidden fees.

It is not unusual for borrowers to have to refinance over-and-over again just to keep up with the payments. This is typically where we run into major financial issues.

The problem is that when you refinance a merchant cash advance, the lender may use funds from your new advance to pay back your previous advance, leading to what is called “double-dipping.” When this happens, you have compounding interest, and in a sense, you are paying double interest on the loan.

This is a very dangerous and risky financial situation to be in. This typically ends with the merchant (or borrower) defaulting on the payments and having to refinance again, if its even available at this point.

Negative Cash Flow

A major problem with this cycle of taking an advance to pay a previous advance is the stress it puts on cash flow. When you are paying a couple of hundred dollars a day to the lender, it can can put a strain on your cash flow. This makes it harder to maintain your day-to-day operations.

A majority of the time, when taking out an MCA, it is due to a need for capital at that moment. But what happens when you can’t cover your other expenses due to the amount needed to pay back to the lender? Do you take out another advance and “double-dip,” or do you default and risk bankruptcy?

This is a situation you don’t want to find yourself in and is why MCA’s have such a bad reputation. They should be used cautiously, or better yet, avoided by all means.

Alternatives to a Merchant Cash Advance

A merchant cash advance can be used when unplanned events happen and you need working capital to survive. It is recommended to only use if you have no other options.

Some alternatives to an MCA could include:

  • Short Term Small Business Loan – These loans offer an affordable alternative to merchant cash advance loans. They are usually much clearer on the repayment plan than an MCA and are paid with a fixed monthly amount.
  • Small Business Line of Credit – These are very similar to a standard credit card. They involve having a set maximum amount, and you pay back over time what you can afford.
  • Bank Loans – This is a great option for small businesses looking to get a loan. The problem with these is that banks have very high requirements for giving out a loan and not every small business will qualify.

In the end, merchant cash advances can help when your business has no other options. If you can keep up with the payments and pay it off in time, you can hopefully succeed with this option. Overall, it would be best if you turned to other types of funding.

If you need help with financing for your business, contact us, and we can help you make the best decision.

A Comprehensive Guide On How to Start a Trucking Company

Are you thinking about starting a trucking business and need to learn how to start a trucking company? Congratulations!

Trucks transport about 70 percent of all freight in the U.S., which means a lot of potential earnings for you! With this kind of rising demand, the trucking industry is serving as an essential industry to keep up with production.

But how do you start a trucking company, and how can you find financing for it?

Keep reading for a comprehensive guide on how to start a trucking company and learn how to be successful in this field!

Learn About the Trucking Industry and How to Start a Trucking Company

Understanding all the moving pieces involved in a trucking business will be important. If you’re involved in the industry already, start driving yourself to get a feel for what an employee’s life is like.

You can also try to shadow an existing trucking company if possible. This will help you understand the business and make decisions about the kind of trucking company you want to have.

There are a lot of moving pieces involved within the trucking industry, and it requires more investment than just buying insurance and a truck. So it’s important to learn about the rules and regulations as well when discovering how to start a trucking company.

Create a Business Plan for How to Start a Trucking Company Successfully

For any new business to be successful, they need to have a business plan. One aspect of that plan should be understanding your target market and analyzing them. This can also inform you what equipment you will need.

For example, if you plan to focus on delivering foods, either to restaurants or grocery stores, you’ll need refrigerated trucks. You’ll need to understand where to find these clients and what their needs are.

While developing your business plan, focus on your competitive advantage. Think about why a client would choose to work with you. Do you have competitive prices and are more reliable?

Creating a business plan before taking any action will help you to pitch your business to any potential investors. Take the time to think things out now before moving forward.

Consider Legal Requirements and Choose a Process Agent

Having a CDL, or Commercial Driver’s License, is only a piece of the legal puzzle. You’ll also need to fulfill other requirements dictated by the FMCSA. Some of the requirements include a Motor Carrier Number, an International Registration Plan, a Department of Transportation Number, and International Fuel Tax stickers.

You will then need a process agent to represent you in court. If you plan to have your trucking company serve multiple states, you’ll need a process agent for each state. The FMCSA has a list of process agents, and that person will be responsible for completing Form BOC-3 on behalf of your business.

Insuring Your Trucking Company

Once you know how to start a trucking company from a legal standpoint, you’ll need to make sure you are properly insured. You will be required to have liability insurance for your trucking business.

This will cover any possible damages or injuries caused by the commercial vehicle that could occur. It’s best to do your research and get several quotes before making a decision on an insurance provider.

Funding Your Trucking Company

One of the biggest questions you’re probably facing is how to actually fund your trucking company. An investment of somewhere around $20,000 can get you started. This would potentially include the cost of insurance, permits, state-specific payments, and a vehicle down payment.

There are a variety of options for finding funding your trucking company, including lenders who specialize in making loans to the trucking industry. Another option is to use a home equity line, sell property, or use your personal savings if these are viable solutions for you.

In order to approach a lender, you should calculate your earning potential. You’ll first need to establish how much you plan on charging your customers. This should be based on miles per thousands of tons of cargo that you will be transporting.

It will be important for you to charge a competitive rate to win over new clients, and your prices should be negotiable. You can also have different price ranges for different types of customers. It’s also important for your prices to be high enough that you can make a profit.

Establishing a Budget is Part of Knowing How to Start a Trucking Company

You need to establish a budget for your trucking company so you can better plan out your expenses and future profits. Think about every possible expense, including office expenses. This can also include things like truck repairs, fuel, cost of work, maintenance, insurance, and truck loan or lease payments.

When working on your budget and if you have financing in place, remember to keep interest rates and future loan payments in mind. You’ll need to make monthly or annual payments on things like registration, truck payments, cost of living on the road, etc.

You should also factor in regular household bills into your budget since you own your own business. This will also come out of your profit. In general, avoid unneeded expenses and always keep track of your fuel usage.

Decide on Your Services and Location

Trucks are not a one size fits all kind of business, so you’ll need to determine what services you’re able to offer since these will depend on you and your trucks. The services you offer might also depend on your location.

Some possible services include moving heavy-duty equipment, agricultural equipment, long-distance trucking, or oil and gas. You may also want to offer your services to the food and beverage industry.

These different services will have different needs, like the refrigerated truck example above, but you may also be able to charge more for those types of services. It will be important for you to determine where you want to be competitive. For example, you could focus on reliability, customer service, speed, price, etc.

Additionally, determine a location for your office. You will need somewhere to park your truck and this might depend on if you’re a solo driver and business owner or if you plan to employ drivers. Also, the more trucks you have, the more difficult it will be to find a space.

Look for a location that leases commercial space with parking available for your vehicles. You should also look for a place that will allow you to perform maintenance and repairs. Consider charging more depending on your location, especially since it’s more difficult to drive a truck through a major city.

Buying or Leasing Your Equipment

Once you have the location to park the trucks, it’s time to either buy or lease your equipment. If you have the funds available to purchase your trucks, consider whether you want to buy a new or used truck. New trucks will likely mean fewer repairs and maintenance.

You might also be able to get a discounted price per vehicle if you plan to buy all of your trucks at the same time. If you plan to lease trucks, you could look into a lease-to-own option as well.

When leasing your trucks, do research to ensure you’re finding the right dealer. Compare options and offers before selecting which dealer to work with.

Hiring Your Drivers

Unless you plan to be a solo carrier, you’ll need to hire drivers and this can sometimes be a challenge. Establish a retention strategy and recruitment process to bring in new drivers.

A trucking company is just like any business, you want to think about the employees and their happiness in order to retain them. Things like performance-based rewards, driver safety scores, efficiency, and life on the road are all important to consider.

Along with drivers, you’ll need an office manager, depending on the size of your business. This could be an office manager who remains at the location and keeps your business open during normal hours.

Promoting Your Business and Growing Your Client Base

In order to both bring in new employees and new clients, you will need to promote and market your business. This should start with your website. Make sure your website is easy to navigate and includes your branding.

It’s also helpful to focus on getting positive reviews from both employees and customers. Sites like Google and Yelp will help you get more customers if they see genuinely positive reviews. Many companies check these kinds of ratings before choosing a supplier.

Also, to stay profitable, it’s in your best interest to diversify your customer base. If a single client is more than 20 percent of your revenue, you could end up in trouble if you lose them. It’s important for you to have a range of clients with consistent loads to drive.

Learning How to Start a Trucking Company is Possible

By following this comprehensive guide, you can learn how to start a trucking company and become a successful business owner. Keep in mind that you’ll need to start with a business plan, financing plan, and overall budget before moving forward with any major purchases.

Also, remember to consider all of the important details including the location, staffing, and marketing for your business.

Contact us today and fill out an application to learn what type of business loan you qualify for!

AR Financing: How Accounts Receivable Financing Can Help Your Business

There’s no single reason why businesses run out of funding when they are looking to grow, but answers can often be found by looking at their accounts receivable report. When a business is trying to grow, AR financing can help increase cash flow based on the amount of unpaid invoices due from its clients.

Here’s everything you need to know about how AR financing can benefit a growing business that is running into cash flow issues.

What AR Financing Brings to Small Businesses

The way that businesses have been funded for the last 50 years wasn’t working for a lot of small business owners. That’s why credit cards and business loans have been replaced with other types of micro-business financing.

For many small businesses, this kind of financing is out of reach. They can’t access the kind of credit that other more established businesses can.

However, small businesses need to acquire financing just like any other business does. They also need to watch out for cash flow problems like any other business. That’s where accounts receivable financing comes in.

Business owners often use their accounts receivable as a way to finance their business. It’s important for them to keep an eye on their accounts payable as well as their accounts receivable.

If a small business owner is looking for AR funding, they need to make sure that their receivables and payables are in good shape, prior to seeking an AR financing lender.

Selling Assets or Getting a Loan

There are a lot of ways for AR financing to help small businesses. There are a few different structures to AR financing and it’s vital to know how things are set up because it can impact how your loan is paid back to the lender.

When you look at your accounts receivable aging report, you’ll likely see a lot of invoices that are either current or past due. Regardless of how old an invoice is, it is due to your business from your customer.

These unpaid invoices may not seem liquid or immediately accessible to you now, but they’re still considered assets.  Your current assets, such as accounts receivable are considered to be part of your liquid assets, and can be turned into cash with AR funding.

Asset sales are when you sell your company’s assets to another company. With AR financing, the invoices that your customers owe to your business are sold to another company (a lender) in return for cash. Your lender is only going to pay you a percentage of the invoiced amount.

You can now use this cash for running your business, bidding on contracts, or getting caught up on accounts payable. You no longer have to worry about when and if your customers are going to pay their invoices. The lender is also responsible for managing collections on these invoices.

There’s also the potential to structure your AR funding as a business loan. Your accounts receivable plays a role because it’s the collateral being used to secure the business loan. While your business retains ownership of the invoice, and you must still collect what’s due, you get the funding you need now.

How the Date of Your Invoice Affects AR Financing

Time is of the essence when it comes to invoicing your customers. The invoice dates and due dates are elements that comes into play when it comes to AR financing. These are factors that a lender will look at when determining whether or not they will purchase your receivables.

Invoices are typically paid within 60 days, or sometimes unfortunately up to 90 days, and beyond. A lender who is going to advance you funds off your aging report will want to fund the newer invoices over older ones. Older invoices are considered riskier than newer invoices.

In addition to advancing you funds on the newer invoices, a lender will also advance on the older invoices. This is where the due date comes into play. A lender will almost always consider past due invoices as something they will not advance you funds on.

The Length of the Accounts Receivable Financing Agreement

The length of your AR financing agreement will make a difference when it comes to the kind of funding you get and how much it’ll cost. Your agreement may be for a few months, one year, or up to several years. The term is always agreed upon prior to the first funding.

A short-term funding agreement might be based on a higher interest rate as opposed to a long-term funding agreement. This is because the lender has a shorter period of time to recoup its underwriting costs before it can begin making a profit.

However, a long-term funding agreement is usually the better option because of the lower interest rates. It depends on how quickly you need cash and for how long you want to take advantage of AR funding.

AR Funding and the Terms of the Loan Agreement

There are a few major terms to keep in mind when it comes to an AR financing loan agreement. There is recourse, non-recourse, advanced amount, and reserve account. These terms are always defined and included within AR financing loan agreements.

Recourse means you are responsible for paying the lender back for any invoices it purchased that do not get paid. Non-recourse is just the opposite, any invoice the lender purchases, it assumes all of the risk on whether it’s paid or not.

Advanced amount is the percentage of an invoice that the lender has agreed to advance to you. The advanced amount typically ranges from 80% to 95%, it just depends on the lender you are working with.

A reserve account is the result of what the lender did not advance to you. For example, if the lender advanced you 90%, then 10% is considered your reserve and is added to the reserve account. The reserve will be disbursed to you once the invoice has been paid.

If you are interested in applying for AR financing, then we can help. Start by quickly filling out our free 90-second application, and get the funding you need today!

AR Financing Helps Businesses Grow

While AR financing might seem like a complex way to help your business grow, think again. Growing businesses have a lot going on and the last thing they need to worry about is cash flow. AR funding is the best way to get that money now.

If you’re looking for other types of financing, then you we can help you with a business lines of credit as well other forms of business funding. Apply today or call 704-904-0774 to speak with a financial advisor.

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