How Does a Merchant Cash Advance Work?

A merchant cash advance is financing that offers businesses money upfront which will be paid back by deducting from the business sales. A merchant cash advance is not like traditional loans. Instead, it is a high APR loan that is advanced to businesses that accept credit card payments. These financing opportunities are paid back by deducting from the credit card sales.

The key to note is that a merchant cash advance is not a loan. Instead, it helps to think about the merchant purchasing your future sales by giving you a lump sum beforehand, which will be deducted when you make the sales plus fees.

The merchant cash advance financial services are charged differently depending on risk factors and the industry in which your business operates. The riskier the business, the more expensive their APR. These charges are also independent of other fees included in processing the money for you, including administration or underwriting fees. These fees might make the funding too expensive.

Before considering merchant cash advance services like cash advance, credit card process, equipment financing, factoring, and purchase order financing, it is wise to consider other forms of funding that might not be as tasking to your business. These might include asking your primary lender for more money, refinancing your existing loans, or getting your business a line of credit.

Are Merchant Cash Advances Tax Deductible?

Merchant cash advance financing is not tax deductible. However, there are legal developments regarding these services. A merchant cash advance is not a loan specifically. The amount injected into your business cannot be considered income. Therefore, not deductible. Also, the fees charged for the loan can be expressed in your books as a business expense. You can write the fees off. With a great tax accountant, you should be able to set this up and prevent your business from extra financial bleeding.

What Is Stacking in Merchant Cash Advances?

Stacking is when a business finds itself in a financial strain and takes more than one loan, sometimes against the approval of the first lender. Because of the nature of merchant cash advance same-day funding, a business can take several loans in quick succession before the records are updated. This quick financing allows for a blind spot for the first lender.

Why Is Stacking Detrimental to Business Owners?

Stacking is detrimental to many small businesses because of five reasons:

Increase Chances of Default

Your business might be in dire need of finances, and your current lender does not approve a loan that covers all the money you need.

A merchant cash advance lender then swoops in and saves the day. But because you already had a previous loan commitment, taking a loan from another lender might compromise your ability to repay your loan from the first.

Some loan contracts from first lenders prohibit you from taking another loan before fully servicing theirs. Still, since you have already committed a merchant cash advance, the first loan might be declared in default as soon as the first lender finds out.

They Cut Your Cash Flow

Merchant cash advance financing has some requirements, one of which is that you need to receive credit card payments in your business. This requirement is set because these types of funding have a repayment system where they deduct from daily credit card sales.

Having to pay back the merchant’s cash advance directly from your credit card sales affects your cash flow. In business, cash flow is king. So, when cash flow is hindered, the business suffers tremendously.

Damage to Your Credit Score

A merchant cash advance is a working capital solution, but it can hurt your credit score. Initially, these financing solutions do not comprehensively analyze your financial health before advancing the funding. With such solutions, you might find yourself way in debt over your head. When your business carries more debt than it can service, the credit score of the business is significantly impacted.

Increase Chances of Liquidation

As discussed earlier, merchant cash advance funding increases a business’s default risk. It also cuts into the cash flow of the business. These two tell-tales point to a time when the business will no longer be able to service all the financing that the business carries. Therefore, the business will be forced into liquidation to repay the lenders. Woe unto the business owner if the business assets were intertwined with personal assets, such liquidation might see them lose even personal assets.

It Exposes You to a Vicious Lending Cycle

Once you have jumped on the merchant cash advance bandwagon, it is challenging to get off it. To start with, these types of financing cut into your cash flow and have a high APR. These two things trap your business in a place where you will need constant funding and refinancing.

In addition to that, these funding options ruin your credit score; therefore, the additional financing needed cannot be sourced from traditional lenders. This leaves you with merchant cash advance financiers who will charge you more APR and cut your cash flow even further.

This lending is predatory and ties a business into the loop of expensive financing, which is not sustainable.

Is Loan Stacking a Crime?

Loan stacking is not a crime, but it is highly frowned upon. There are three types of loan stacking, each with its detrimental values. These include credit shopping, credit stacking, and fraud stacking.

Credit shopping is where a business applies for several loans in an effort to get the best interest. On the other hand, credit stacking is where a business borrows a number of loans despite its objective capability of paying back the loans. Lastly, fraud stacking is when a business takes several credit funds without the intention of paying them back.

Though not a crime, all these stacking forms are not good business practices and might expose your business to severe unnecessary repercussions.

Bottom Line

A business can consider a merchant cash advance because it can come in handy and save the day when traditional lenders fail to. However, such financial services should be cautiously approached as they might end up crippling your business.

In addition, a business owner should pay attention to prevent loan stacking. As explained in the article, stacking can be detrimental to business.

All in all, running a business is not child’s play, and as a business owner, you stand the best chance of knowing what your business needs. Therefore, ensure that you properly assess the pros and cons of the money you bring into your business.