Merchant Cash Advance Scams

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April 21, 2014:
Why are people selling you merchant cash advance services? Because you are a gold mine!

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Business Loans:

Merchant cash advance loans should be a last resort if you have other ways of getting money for your business. They may be convenient, but they are in the same category as payday loans.

Avoiding Mechant Cash Advance Scams

You may be getting attention because an advance locks you into a merchant account.

Merchant Cash AdvanceHow do you avoid merchant cash advance scams? Knowledge is the key to avoiding ripoffs from fake business cash advance providers. For example, you should not have to pay any fees up front to be considered for a cash advance, and the cash advance is not considered to be a loan, so there should be no reference to interest rates. Keep in mind that the cash advance provider is going to be making money by collecting a certain fixed percentage of your credit card sales automatically. There should be no collateral requirements, and you should not be asked questions about your personal finances. You should not have to write any checks or give anyone cash. Legitimate merchant cash advance companies will ask for merchant account statements in order to qualify you, and may ask for other business references in order to make sure you are in good standing with your landlord and your business is expected to be around for the long haul. Understanding some of the terminology of the merchant cash advance process will also help you discover whether you are dealing with a legitimate company. A legitimate company may be known as a “factoring service provider” who basically is purchasing an accounts receivable loan from you. They will be charging a “factoring rate” of between 14 and 40 percent of the amount that is being charged, and they may use the term “business cash advance” instead of “merchant cash advance” since both are synonymous. The key to avoiding scams in merchant services it to ask lots of questions and not to commit to anything if you aren’t sure about whether you are getting a good deal. The percentage withdrawn should be fixed, not variable, and you should consider what your average credit card receipts are every month so you can be sure that you have funds left over after paying for the cash advance. For example, if you have a 35% margin, and almost all your revenue comes from credit or debit card users, you need to be sure that you can pay all your other bills after the cash advance repayment takes a chunk out of your revenue. The phrase “safe retrieval percentage” is used to describe how much can be taken out without harming your daily operations, and you need to be cognizant of expected and unexpected expenses when taking this into consideration. This is not to say that a cash advance is a bad thing, but you still need to be sure that your company is going to last long enough to repay the advance, since there is undoubtedly a clause in the contract that stipulates how the advance should be repaid if the business fails.

Notes and Special Information

Special note: As with anything, it pays to consider worst case scenarios when considering how much of a cash advance you need. INC advises against taking an advance.