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Merchant Cash Advances: Restaurants, Beware.

April 06, 2017

Looking for an alternative financing option for your restaurant? A merchant cash advance might be tempting, but take heed of their negative effects.

Restaurants need working capital to survive and grow—and a restaurant’s profit depends on its commitment to innovation and fresh ideas (what the customers want). can a restaurant commit itself to new ideas when new ideas cost money and times are tight? A merchant cash advance could be tempting, but take heed of their negative effects.

What’s a merchant cash advance?

A merchant cash advance, or MCA, is a purchase and sale agreement designed to meet the needs of up-and-coming restaurants. With a merchant cash advance, you receive a discounted lump sum payment in return for a portion of your restaurant’s future credit and debit card sales.

What does this mean?

If your restaurant takes advantage of an MCA, you do not pay back the debt like you do when taking out a loan. For example, let’s say the “funding partner” (who controls the MCA) pays you $25,000 up front. This funding partner now has the right to $30,000 of your business’ future sales. Discounts do vary according to each MCA, but typically range from 17 to 40 cents per dollar funded.

What is the repayment term like?

Repayment is typically automated and your funding partner will receive his/her fixed percentage of credit and debit sales right from your payment processing system. Most agreements schedule full repayment within six months to one year.

What are the disadvantages?

Typically, these loans do more harm than good.

  • The interest rate on MCAs is typically higher than traditional loans since the borrower does not have to put up any collateral ahead of time.
  • Also if your restaurant does not experience a high volume of credit/debit card sales, paying back the MCA may take longer than usual.
  • There are some qualifications you must meet to acquire an MCA....
  • You need to have been in operation for at least four months
  • You need to have a personal credit score of at least 500
  • You must regularly accept credit and debit card payments
  • Companies that offer merchant service cash advances can charge a variety of different fees.

Though on the surface this financing option seems to be a fast and easy way to meet economic needs, it is a risky option. Oftentimes, one MCA leads to another, and another, and soon you’re caught in a debt trap. Consider alternative financing options such as unsecured business loans, equipment leasing, SBA supported loans, a business line of credit, or even friends and family loans.

Wondering what you can do if you’ve already enlisted the help of a merchant cash advance? Contact any member of our Hospitality Services Group.

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