The Lure and Dangers of Merchant Cash Advance Loans

Don't Fall Into the High-Interest Debt Trap

We’ve all seen the pop-up ads, emails or mailers from Merchant Cash Advance Lenders (MCAL). Most make the same enticing claims:

  •  Qualify for a Line of Credit in Minutes!
  •  E-Z Online Application!
  •  Funding in 24 Hours!
  •  No Collateral!
  •  Open a Fee Account in Under 5 Minutes!

It might be fast and easy to get the loan, but at what price? Most MCAL’s charge an outrageous 40%-350% in interest. And sometimes the repayment schedule is unsustainable for a small business. You’ll be paying a heavy price for that “easy” loan.

Since the Sub-Prime mortgage catastrophe and recession, the fast loan industry for businesses has grown and continues to grow at a phenomenal rate.


To a business that is growing faster than its cash flow — the lure of fast, easy money is almost too much to resist. However, what some business owners don’t understand is that many of these companies are completely unregulated. Once you sign up, you have entered into a contract with fine print that very few people would want to agree to.

Daily Deductions & Don't Miss a Payment

Almost every day, we are seeing companies that have these loans and are struggling under the burden of making the payments. Many of these MCALs deduct their payment from your bank account every business day. You get weekends off since the banks are closed and they can’t deduct. And, if you miss a payment because there’s not enough money in your account, they have the right to call the loan all due and take all the money out of your account the next time there’s money there.

A Bad Deal All the Way Around

Credit underwriting for these companies is basically looking at copies of your bank statement and deciding how much they can take out of your account from your cash flow to pay themselves back. The pricing of these loans, while many of them say there are no “hidden fees,” is never clear and is usually based on very high fees. The fees are not called interest, so as not to look like a loan.

Case Study


High Interest and Early Payoff Penalties

Business Finance Corporation recently looked at a loan that was made to a small business for $20,000. The daily payments were $220 a day. Calculations showed that the loan would be paid off in 126 daily payments — about 6 months. The total payments will equal $27,800 and amount to a 81% annualized interest rate. If the loan was paid back in 3 months or less, the payoff would be $24,800 and amount to a 96% annualized interest rate.

Case Study


You Could Lose Your Business

We also saw a loan agreement with one of these MCAL companies in which the business owner assigned his building lease to the lender and gave the lender specific rights to walk in and take over their company.

Case Study


You Might Be In Debt For a Very Long Time

Some of these MCAL companies pile new loans on top of old loans, almost assuring that the borrower won’t be able to get out of debt. A company we looked at had gotten a loan of $750,000, with daily payments of $2,400. Even after paying $250,000 they still owed $750,000.

Some Final Thoughts

The documents and UCC filings that these companies use aggressively prohibit the borrower from entering into any other financing agreements with any other company, and woe to any financer who ignores those terms because they will lose all rights to collect, and can be sued by the internet lender for interference with their borrower.

CAUTION — some of these companies call their documents Factoring Agreements to circumvent State Lender Licensing Regulations. They are not factoring!

Factoring is when a company, like ours, purchases specific invoices at a discount. We advance a percentage of the invoice(s) to you, the business owner, and when your customer pays the invoice, we are paid back and you get the balance of the funds due you.

These internet lenders just advance a sum of money “against what’s owed to you” or against “future sales,” and then deduct payments from your account daily or weekly.

At Business Finance Corporation, we NEVER take money out of your bank account. Our fees are based on a discount of the invoices you choose to sell to us. We help solve cash flow problems, not create new ones.

Learn More About Invoice Factoring

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