In the freight and shipping industries, business owners are often on the lookout for working capital solutions which provide flexibility for short term periods. Recently, merchant cash advances have been on the rise, and many business owners in the shipping industry have been tempted to use them. However, what appears to be a great solution on the surface can actually reduce overall revenue, and prevent business growth. We are going to look into a few of the reasons why you should avoid merchant cash advances.
Merchant Cash Advances Are Only Short Term Solutions
The terms on a merchant cash advance go up to 15 months. While merchant cash advances are supposed to be flexible, by not requiring monthly installments like loans, all capital, including interest, must be repaid within this small window. Unless your business is generating enough revenue where merchant cash advances would be beneficial, you may find yourself between a rock and a hard place trying to repay a cash advance within the terms of the agreement.
A Merchant Cash Advance Is Expensive
Merchant cash advances are not inexpensive financing solutions, even though they are very accessible. In addition to getting the capital you need, along with a short period in which to repay it in full, the interest on merchant cash advances can be prohibitively high. Lenders usually tack on a multiplier to merchant cash advances, which can leave business owners paying up to 50 percent more than the principal amount borrowed.
Merchant Cash Advances Are Often Used Incorrectly
Merchant cash advances appeal to business owners because they are pushed for their versatility. A merchant cash advance can theoretically be used for everything from purchasing supplies to hiring staff, and even meeting immediate financial obligations, like rent or other expenses. The problem is that when a cash advance is used, and then the principal is repaid, there is still the remaining interest left outstanding. Using a merchant cash advance for paying bills or relieving a strain on cash flow will not solve the problem. It is an attempt to place a band-aid on a larger hole. Once the amount provided by the merchant cash advance is used, the cash flow issues will still crop up, only this time with the outstanding balance of the MCA on top of it. Unless you are using a merchant cash advance on something that will immediately give you a return, such as new equipment, then you are setting yourself up for even more financial strain.
There Are Alternatives To A Merchant Cash Advance
If your freight or shipping business is in need of working capital, you do not have to resort to a merchant cash advance. At Express Freight Finance, we provide a fast and inexpensive alternative to merchant cash advances through freight bill factoring services. Contact our offices today to learn more about our working capital solutions, and avoid the pitfalls of merchant cash advances.