Can I refinance a merchant cash advance?
Options to help pay off a merchant cash advance
- MCAs have high costs that can be mitigated with a lower-interest term loan.
- Online lenders may offer short-term loans to replace an MCA.
- Take out an MCA to pay off an existing MCA, similar to refinancing.
- Caution: MCA lenders often use a practice called “double dipping” to charge interest twice.
If you’re a business owner struggling under the weight of a merchant cash advance, traditional and alternative lenders can help you can find relief.
Merchant cash advances, or MCAs, don’t work the same way as traditional term loans. For example, the total repayment for an MCA is calculated with a factor rate, rather than an annual percentage rate (APR). This usually makes the payoff amount significantly higher. And because MCAs are not loans — they’re a financing tool based on a business’s future revenues or credit card sales — it’s not possible to refinance them with a loan.
Traditional or alternative lenders can help. It’s important to note you can’t technically refinance an MCA the way you could with a mortgage, auto or student loan. You’re simply paying off high-cost debt with a lower-cost product.
You can also pay off an MCA by taking out another one — this essentially works like refinancing. But be aware that this method may involve hidden costs that could keep your business trapped in debt.
Find a term loan
Along with the high costs of an MCA — a 2014 report from the National Community Reinvestment Coalition said the equivalent APRs often range from 60 percent to 200 percent — a major drawback of cash advances is they do not help your credit score. Unlike traditional bank lenders, MCA providers do not report to credit bureaus. So even if all your payments are on time, there is no opportunity to boost your credit.
Paying off your high-cost MCA with a traditional bank loan may not be possible. For one, you may have turned to the cash-advance option because you couldn’t qualify for a bank loan. And if you have an MCA, a bank may deny your loan request, viewing the cash advance as a sign of financial instability.
Banks usually offer the most favorable interest rates, ranging from 2 to 6 percent. And because banks grant longer terms — about three years for medium-term loans and up to 20 years for long-term loans — their business products generally result in much lower monthly payments. If you can’t get a bank loan, turning to an online lender may be the next-best option.
Online lenders are in demand, and though some online business loans come with hefty APRs of around 100 percent, many others are in the 10 to 25 percent range, and offer similar or longer repayment terms than MCAs. Many online lenders can approve your loan request in a few days and typically offer from $5,000 to $500,000, depending on your business’s needs and revenue.
Online lenders cater to newer businesses that aren’t established enough to obtain a bank loan. If your business is only a few years old, online lenders offer an alternative path as they require less stringent credit standards, though you’ll be paying more in interest because you have a higher perceived risk and your loan is being processed more quickly.
Take out another advance
As previously mentioned, MCAs are not loans and use factor rates, rather than interest rates or APRs, to determine financing charges. Factor rates apply only to the original loan principal, not the remaining principal that gradually decreases as payments are made. In other words, if you take out a cash advance of $20,000 with a factor rate of 1.25, you’ll wind up paying $25,000 ($20,000 x 1.25 = $25,000), even if you pay off the advance early.
APRs tend to be less expensive. For instance, if you took out a one-year, $20,000 loan with a 25 percent APR, you’d end up paying $2,523.12 in interest and fees, for a total amount of $22,523.12. That’s nearly $2,500 less to finance the loan versus the cash advance.
If your business has an immediate need for more cash, you can essentially refinance one MCA by taking out another. The problem of “double dipping,” or paying interest on top of interest, may come into play in this scenario. For example, let’s say you’ve paid off half of a $20,000 advance and wish to take out a second one for another $20,000.
The lender may use the principal from the second advance to pay off the balance on the first advance. In this example, the $10,000 balance left over would be paid off by rolling it into the new $20,000 MCA, leaving $10,000 in accessible funds. The business owner is not only receiving less capital than they expected, but they may be subjected to financing charges on the new principal of $30,000.
Using the same factor rate of 1.25, the new repayment amount is $27,500 ($30,000 principal x 1.25 = $37,500 - $10,000 rollover = $27,500). But if the lender “double dips” and does not forgive the interest remaining on the original $10,000 loan balance ($2,500, for total of $12,500 owed) then the new repayment amount is $28,125 ($32,500 principal x 1.25 = $40,625 - $12,500 = $28,125). That means a business owner is paying $625 extra for the same borrowing privileges.
The practice of “double dipping” varies from lender to lender, so make sure to understand the rules before you have signed your loan documents.