Why is Merchant Cash Advance so expensive?

By David Harrison
Content writer
Last update: 10 March 20201 minute read
Why is Merchant Cash Advance so expensive?

Table of Contents

Finding the most appropriate form of finance for your business has always been tiring, time-consuming and frustrating. Nevertheless, acquiring access to vital sources of external funding is a responsibility that no business owner can shy away from. It can be made more excruciating when your business is suffering from poor credit, severing you from more traditional forms of business finance. But, there is one product that could help offer the support you need - Merchant Cash Advance. However, the one issue that borrowers always have with this type of finance is that it’s very expensive.

Why and how is Merchant Cash Advance expensive?

Merchant Cash is an excellent way in which businesses can quickly acquire and utilise essential funds for their business. An Unsecured business finance product that uses your business’ credit and debit card revenues, it’s considered a flexible alternative solution to more traditional forms of funding. Although the product can be used for a wide range of purposes, Merchant Cash Advance is also a useful support mechanism for businesses that are desperate for additional funds after a prior finance agreement. But, the reason for why Merchant Cash Advance tends to be more expensive than other types of business finance is due to 3 things: increased risk to the lender, the charges applied and that it’s currently unregulated.

Because Merchant Cash Advance is an Unsecured finance product, business lenders are accepting a greater risk by lending to your business. Should your business default or cease trading whilst the agreement is in operation, they’re unable to seize your key assets. This means that the lenders will have to accept their losses, but your credit score and business history will be tainted resulting in business finance becoming much harder to acquire and more expensive.

Another reason for why Merchant Cash Advance can be so expensive stems from the way it is charged. This form of finance often features high interest and factor rates which are usually in triple digits, as well as transaction fees. Because the product doesn’t work using terms or set repayment periods, your business repays as it earns revenue. This means there is no limit to how long you can have the product for. However, bearing in mind the interest rates, repaying the product quickly is certainly in your favour since it’ll help keep the excess costs at bay. That said, most businesses that apply for a Merchant Cash Advance tend to repay the product within 6 – 12 months.

In addition, Merchant Cash Advance solutions aren’t bound by Usury Regulations and therefore aren’t regulated, unlike other business finance products. The reason for this is that Merchant Cash Advance doesn’t operate like a loan, allowing it to escape the necessary criteria for regulation. What this means for borrowers is that business lenders aren’t restricted to how much interest they can charge or who they can offer an advance to. It can also result in such practices like adjusting terms and conditions in order to increase interest rates whilst you’re in the middle of an agreement. Plus, the lack of regulation can also cause unscrupulous lenders to adopt a predatory business model, deliberately targeting businesses that have recently completed a prior finance agreement and may be in need of urgent cash. But in terms of how Merchant Cash Advance is sold, representatives may not always be upfront about how they charge, potential fees or maybe misleading when comparing other finance products. So in order to protect your business and keep charges under control, familiarise yourself with financial terminology, request thorough explanations into all aspects of their product and pursue written guarantees in the contract before signing. As always, before entering any financial commitments, we advise you to discuss any potential agreement with your business accountant.

How do I find the right Merchant Cash Advance solution for my business?

Finding the most appropriate finance package for your business can be a long and tiring endeavour. Ultimately, your goal is to source a product that offers your business value for money, allowing it to prosper. But when looking for Merchant Cash Advance you need to be absolutely sure you’re getting the most suitable solution for your business, packaged with rates that won’t cause undue harm. Knowing who to trust and when to look elsewhere can be tricky, but you don’t need to go it alone.

In spite of the expense, Merchant Cash Advance is still a highly beneficial finance product. Being able to support everything from business projects and seasonal trading fluctuations to asset purchases in as little as 48 hours, it’s a lifeline for your business when you need it most. However, to get value for money and receive a great rate, building a trustworthy relationship with a reputable lender is essential. You just need to find a business lender that appreciates and understands your business’ unique situation, but how?

With the services and expertise of the business finance experts at Rangewell, we can help you source the most appropriate and affordable finance solution for your business, accompanied by highly competitive rates to match. Whether it’s for new growth projects, support during slow sales periods or an unexpected emergency, Rangewell is offering you a helping hand and leading the way forward.

Our values are simple – We’re on your side

At Rangewell, our services are clear and transparent. We support a wide range of SME businesses of every shape and size, for finding every type of finance. Follow us on Twitter and LinkedIn for business tips and tricks, and feel free to call us on 0203 637 2340 if you’d like to chat about what we can do for you.

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