Beware of these very expensive types of loans


Expensive types of loans

After the 2007-2008 financial crash, banks are still haunted by their own shadows. Thus, they categorically refuse to lend to small business owners who are constantly in short supply. Left with no delay, small business owners look to alternative lenders to get cash quickly and easily to keep their jobs running.

Here we analyze why you should be wary of certain types of loans and point out other lending options that you can explore.

Cash advances to merchants (MCA)

Cash loans to merchants are “payday loans”. for business. MCA pays you a sum of money that you pay daily, weekly or monthly with a percentage of future credit sales. They are very expensive, come with hidden fees, and the annual interest rate can easily go up to three digits.

Why MCAs are Attractive to Small Businesses

Cash loans from merchants create the appearance of a good lending opportunity. They quickly offer cash to business owners with bad credit history without the need for collateral. Instead of flat monthly payments, they seemingly have a simple repayment process – daily or weekly deductions directly from sales. Again, their fees are not expressed as a percentage, but smart ratios from 1.2 to 1.5 are used to determine the fees.

Why MCA is a very expensive form of financing

Despite the attractiveness and appeal of MCAs, they are some of the most expensive financing options available. That is why you can opt out of these types of loans:


MCA does not have standard loan rates. Average annual interest rates range between 40% -120%, but can be as high as 400%! Small business loans usually have an annual rate of less than 10%. Although credit cards have higher rates, they are nowhere near what you get with MCA.

The catch is that you won’t see the APR MCA in black and white as you would with other types of loans. They are hidden with complex odds ranging from 1.2 to 1.5. Due to the lack of federal regulation, the transparency of the disclosure of information on fees is low.

Very expensive financing options

Let’s say you take a cash advance of $ 30,000, which will be paid daily for 180 days at a factor of 1.4. You end up paying $ 42,000. This is a total interest of $ 1.2000. It is very expensive! If you don’t make an exorbitant profit, the cost of the loan will be greater than the value it brings to your business.

The cost of borrowing on an MCA loan eats up your daily profit. When you finish paying off your loan, your business will not grow and you may end up worse off than you started. Again, MCA offer short repayment periods ranging from 3 to 12 months. If sales are low, the repayment may take longer and the lender may add a commission of 5-10% of the loan amount.

The borrowing cycle trap

Cash advances from merchants can easily trap you in the borrowing cycle. Their predatory annual interest rates make it difficult to keep enough cash flow to run your business. Short repayment cycles make it difficult for you to keep enough cash. At the end of the month, you may not have enough money to pay for labor, rent, and utility bills.

If you have no choice, you will be forced to go for another round of MCA funding. This is how businesses lose control and go into debt.

Best option for MCA

While MCAs can offer a quick solution to a cash flow problem when you run out of options, they are very expensive and can be a death trap for your business.

The best alternative to MCA is a small business loan. Small business loans are cheaper, they have a simple application process and you will receive your money within a few days. Unlike MCA, small business loans will not swallow you up in debt. For example, Camino Financial offers small business loans on favorable terms with flexible repayment terms within 2-10 days.

The bottom line is that you are much better off financing your business with a small business loan than with an MCA.

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