Managing cash flow is crucial for any business. If there’s a slow period in the business, a merchant cash advance loan may seem attractive, as it gives the business some money to help them stay afloat until business picks up again. Unfortunately, this deal is often too good to be true, and those who do obtain a merchant cash advance loan need to do so carefully. There is always a risk of default, which could be detrimental to the business.
About Merchant Cash Advances
Merchant cash advances are loans given to a business owner to help them when they need extra cash. In most cases, the lender receives a percentage of sales from the business to repay the loan. This will generally be paid daily or weekly. While this can be beneficial if business owners need a little bit of cash to keep the business going, the lender doesn’t care if the business continues to be slow or if it picks back up again – they still expect to receive the money back from the loan plus the interest. All too easily, business owners may realize they’re falling behind if the business doesn’t pick back up again as fast as expected.
The Dangers of Falling Behind
Falling behind can lead to the business owner receiving notices from the lender about catching up and letting them know that a default is imminent. Business owners may try to keep paying on the loan with the hope they can pay it off with the next sale or job, but this may not be realistic. In fact, the stress can lead to the business owner, making things worse for their business, and if the next job doesn’t come fast enough, the account could go into default.
What Happens if Someone Defaults on the Cash Advance?
Defaulting on a merchant cash advance loan leads to a variety of different issues for the business owner, depending on the size of the loan and the terms of the contract. Merchant cash advances aren’t considered loans, so they don’t fall under the same laws as most loans. This means lenders can include clauses like a judgment clause, which allows them to take the funds in the business bank account without having to go through the courts first. Lenders can also file liens against the business, file a report with the credit boroughs, and more.
What to Do When There’s a Risk of Defaulting
Depending on the amount of the cash advance, a default can be detrimental to the business. As soon as a business owner starts to get behind and they’re at risk of default, they may want to speak with a merchant cash advance attorney. An attorney who has experience with these types of loans and can read through the contract to see what options the business owner might have. In some cases, they may be able to find a way for the business owner to get out of the loan without further issues or help them handle a default with as little risk to the business as possible.
Merchant cash advance loans can look attractive, but they can lead to a variety of issues and cause a business owner to get into a cycle of debt that’s difficult or impossible to get out of. If you’ve used a merchant cash advance and you’re struggling to repay it, speak with a merchant cash advance attorney right away to learn more about the options available to you.