Former small business owner and Heartland lending expert Damon Maletta has been an advocate for merchants seeking loans. He penned the article “What to Know Before You Owe,” reviewing and rating financing sources available for small businesses based on speed, transparency and risk. He also shared his own personal experience when trying to secure a loan as a business owner. His lending story is a cautionary tale on how to detect deception when partnering with a merchant cash advance (MCA) provider.
To add to his wisdom and excellent tips, here’s how you can avoid putting your cash flow and business at risk with an MCA. Be aware that hiding the true costs of their offerings and repayment terms is a reoccurring issue with MCA providers. Many will even modify the terms of a loan midstream.
Understand Interest and Fees
MCA providers tend to charge more to borrow money than traditional banks. To make their offerings more appealing, they don’t use the word “interest” and choose the not-so-clear term “cents on the dollar” (or C.O.D.) instead.
Here’s an example:
Cents on the dollar of $1.44 means for every $1 borrowed, you pay 44 cents interest, or 44 percent. However, the C.O.D. is often not the only cost incurred. If you’re seeking a $25,000 loan, you likely won’t receive that amount because origination and application fees are taken prior to funding. You’ll receive $24,000 total, but still pay the same interest you would on the full $25,000. The deception lies in the undisclosed origination fee when the loan offer is presented.
You Must Qualify First
You should still submit an application with any MCA provider you’re considering. Lenders don’t typically provide a quote without first checking your credit, so while it might result in some unwanted cold calls, it will benefit you in the long run. Also, work with several lenders to ensure you get the best deal possible.
Beware of the Number Game
A common tactic of MCA reps is to sway you with rosy figures, often out of context. If fast-talking and number-spinning begins, immediately ask to have all those percentages and points put into clear context: “OK, you said 15 percent, but 15 percent of what exactly?” It’s their job to sell you, but yours to keep them honest.
Questions to Bring Out the Truth
If the MCA provider you’re considering doesn’t clearly answer all your questions, this is a huge red flag, as you don’t want any surprises after you sign the contract. Your best bet in this case is to look for a different financing option. Here are some questions to ask:
- What’s your company’s name, address and website?
- Do you work directly for the company, or are you a broker or independent (1099) contractor?
- Are there any up-front application fees?
- Can I pay the loan off early if I choose to, without a prepayment penalty?
- Would I have to change payment processors in order to obtain a loan from your company? If so:
- What’s the processor’s name, address and website?
- Will the processor quote exactly what I will pay for processing, excluding the Interchange?
- Will the processor increase my processing costs every six months, even if the Interchange stays the same?
- What’s the approved loan amount, and how much will be deposited into my account?
- What’s the total cost of this loan, including interest, origination fee, application fees and other fees?
- What other fees apply during the term of the agreement?
- Does my loan have a fixed term in months?
- Will my payments be a fixed dollar amount or a fixed percentage of my card volume?
- Will my payments be taken every day or only on business days?
- What other fees are associated with the program?
- Can I write off some or all of the interest on this loan?
- Will you report my payment history to business credit bureaus to help me improve my credit profile?
Heartland Can Help
Heartland Lending Services is changing the way small businesses think about loans. Backed by the power and reach of Heartland, we’re providing small businesses with alternate and transparent solutions. That’s because only Heartland and its lending partners offer crystal-clear loan terms, repayment schedules and customer service. Our mission is to help small businesses thrive, expand and succeed.
Let our lending experts evaluate your business needs and provide you with options designed with you in mind.
Click here to learn more about Heartland’s Lending solutions.