• Calla Norman

Don’t Get Small Business Scammed: The Risks of Merchant Cash Advances

Updated: Jan 11


Pete Tolman, owner of Iron Born Pizza

Iron Born Pizza was able to refinance their high-interest merchant cash advance loans with Honeycomb!


Especially in times where supply chains and customer behaviors are unpredictable, and you might need a bit of cash flow for your small business, sometimes it might seem like a good idea to get some quick capital from a merchant cash advance.


However, these lenders can lead to some serious risks for small businesses. A cycle of debt, astronomical APRs, no control over how you pay back your loan, and significant legal rights taken away from you as a business owner are just the beginning of the problems that these loans can cause.


Read on to find out more about predatory online lenders, the havoc they can cause for small business owners, and how you can get fair capital for your business by crowdfunding a loan from your community.


What is a Merchant Cash Advance?


If you’ve looked up “small business loans” on Google, you’ve probably seen a few merchant cash advance companies appear, especially at the top of the page under paid ads. (The money spent on these ads are just one of the reasons why these loans are so expensive.)


They’re all slightly different in how they take your money, but the basic premise is that they offer you fast access to cash - sometimes in as little as minutes, in exchange for high borrowing prices.


Many small businesses fall into the trap of merchant cash advances when they find themselves in need of fast working capital - such as when supply chains were broken and cash flow was stagnant during the height of the pandemic lockdowns. However, there are some major problems with these loans, and small businesses need to be really wary of how they interact with them.


What are the biggest problems with Merchant Cash Advances?


Merchant Cash Advances are the most expensive financing out there


You can find merchant cash advances with APRS of 200% or more out there. Yowch.


If you think about these rates in comparison to interest rates from a bank loan or a Honeycomb loan, there’s a clear winner. Often, these astronomical APRs that merchant cash advances charge mean that small businesses get trapped in a cycle of debt that’s incredibly difficult to exit.


Merchant Cash Advances limit your control over paying back your loan


The way that most merchant cash advances get their money back is by taking an amount off the top of your credit card sales. You don’t get a real choice in how you pay back the loan, and from what source. This can also mess up your cash flow for your business operating activities.


The fine print on Merchant Cash Advances can cause legal problems


It’s so important to read the fine print if you’re looking at merchant cash advances, because it can get you in trouble. Often, they’ll want you to sign a confession of judgement, which waives any of your rights to defend your business if they want to take you to court.


Also, merchant cash advances have intentionally tricky contracts that often hide their APR amounts (among other things), so you might not know how much you’re paying until it’s too late.


Merchant Cash Advances don’t impact your business credit score


Another thing about merchant cash advances is that they don’t really help you build credit, even when you go into debt. While yes, you don’t need to have good credit to get a merchant cash advance, it’s not going to help your credit score improve like getting a different kind of loan would.


What other funding options are available besides Merchant Cash Advances?


There are tons of opportunities for financing a small business out there, from small business loans to a myriad of alternative forms of financing. All have their pros and cons, but if you’re looking for a relatively quick way of raising capital for your business that won’t bury you in debt, might we suggest crowdfunding a business loan?


First, if one of your hesitancies around getting a small business loan is that you’ve been rejected by banks (which might be why merchant cash advances seem attractive at first), just know that you’re not alone. When the SBA says no, that doesn’t mean that Honeycomb will shut you down. While we do perform a credit analysis, we also look at the whole picture - you - when looking at your loan hesitation.


Also, you might need your financing fast, which is why you’re looking at a merchant cash advance. We get it! While we can’t get you money in minutes like they can, you can access your funding as soon as you hit your minimum - which can be mere days from launching your campaign!


There are also so many benefits beyond just getting the money you need if you run a Honeycomb campaign. From improving your customer relationships to getting you a much-needed marketing boost, a crowdfunded small business loan can grow your business in more ways than one.


Let your customers have your back, not online lenders


Crowdfunding with Honeycomb Credit can allow you quick access to capital without the headache and insane amounts of debt that you’ll find with a merchant cash advance. Find out more about running a Honeycomb campaign by filling out the form below.