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  • Writer's pictureCalla Norman

Five Reasons to Avoid Merchant Cash Advances

Updated: Jul 25, 2023

Does this seem familiar to you? You’re growing your local business, and run into a situation where you need a bit of money - pretty fast, too. Maybe you need to grow your inventory to meet a sudden increase in demand, or maybe your renovations ended up being a bit more expensive than you initially thought and you need a spot more funding.

You go online, and lo and behold, there’s a lender who’s able to get you the funding in a matter of minutes! It’s through a reputable business that you might be familiar with - maybe like Toast or Square. Seems like a great idea, right?

Well, we’d encourage you to think twice about these kinds of loans, also called Merchant Cash Advances. Here are a few reasons why you should avoid them:

Merchant Cash Advances have insanely high interest rates

An APR for a Merchant Cash Advance can range from 60% to 200% - that’s just too high, especially for a larger loan. While it might be manageable if you need a bit of quick cash that you know you can pay off quickly, even so you’re going to be saddled with paying (in our opinion) way too much interest.

Merchant Cash Advances can lead you into a cycle of debt

With the above point in mind, those high APRs can lead to you possibly needing to take out even more debt to cover the first loan. As a small business owner, you know you need to expect the unexpected, and unfortunately Merchant Cash Advances seem like an attractive band-aid for quick financial needs. However, if you’re not careful, it can lead to you taking on more debt than you intended to.

Luckily, Honeycomb Credit allows you to refinance high-interest loans such as Merchant Cash Advances into more manageable rates - plus, you won’t be having to pay back some faceless corporation - you’re paying back your community!

Merchant Cash Advances limit your payback options

Many Merchant Cash Advances get paid back by skimming a portion off the top of your credit card sales. This means you don’t really have any control over how you pay back your loan, and it takes a chunk out of the revenue you earn that you could use for daily business operations.

Merchant Cash Advances don’t build your credit score

Why would you look into local business funding that can leave you high and dry and won’t even improve your credit score? If you’re looking at a Merchant Cash Advance because they don’t require a good credit score, we get it, but also - shouldn’t you look at something that’s going to make it better?

Merchant Cash Advances could land you in legal trouble

Like with any kind of funding opportunity (including us), you should always read the fine print - and this goes triple-fold for Merchant Cash Advances. They have intentionally tricky contracts, and often, they’ll want you to sign a confession of judgment, which waives any of your rights to defend your business if they want to take you to court.

So how can I avoid all these troubles with Merchant Cash Advances?

Honeycomb Credit offers an alternative to financing from traditional banks or Merchant Cash Advances like the ones we’ve described here. Instead, you have the opportunity to create an investment offering for your business, which your community gets to invest in! This gets you the money you need quickly and easily, and also boosts your street cred and marketing power in the process. To learn more, fill out the form below.


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