We’re writing a follow up on our previous blog post because of the overwhelming response we received from our readers. Thunder Funding wants to be very clear that we do not condone many of the practices of Merchant Cash Advance providers, they can be predatory and really damage your trucking business by keeping you in a vicious cycle of debt which is extremely difficult to get out of.
Merchant Cash Advances (MCA) v. Factoring
MCAs unlike your traditional business loans, where banks loan you money at a certain interest rate, the cash advance provider purchases your future sales - which you have to repay along with other fees. Truck business owners have to be extremely careful with how MCAs structure their fees. We’ll illustrate how their fees work in a bit.
Factoring on the other hand, is a much safer way for truck business owners to access fast cash by selling their invoices at a discounted rate to a factoring company. Good factoring companies, like us here at Thunder Funding, will be completely transparent from the get-go. You will know exactly how much money it will cost you per invoice, which usually is a very small fee compared to the fees that these MCA providers will charge you.
Here’s an example from NerdWallet on how the fees work:
MCAs don’t charge an interest rate like a traditional loan would, MCAs charge what is known as a “Factor Rate” (not to be confused with Factoring) which usually ranges from 1.1 to 1.5.
“To calculate the cost of a merchant cash advance, multiply the amount received by the factor rate. For example, if you are approved for an advance of $50,000 at a factor rate of 1.4, your total repayment amount will be $70,000, which means you’ll be paying $20,000 in fees.
But to understand the total borrowing cost of a merchant cash advance, you should always calculate the factor rate and additional fees into an APR. This will also help you determine how long it will take to repay the advance in full.
Let's break down what this MCA looks like if the provider deducted 10% of your monthly credit card sales until you repaid the full $70,000 based on different revenue amounts:”
“In this example, paying off the debt faster actually leads to a higher APR. If your sales are lower, your APR decreases — but it takes longer to pay off the debt. In either instance, you’ll still pay the same in fees. However, the different APRs show how expensive a merchant cash advance can be regardless.” For more info click here.
We hope that this example clearly shows how MCAs make money - by putting the borrower in a massive amount of debt.
Thunder Funding wants you to be a savvy business owner and warn you about predatory practices that can be detrimental to your trucking business.
Factoring companies like Thunder Funding, would never put you in this kind of situation. We have simple competitive pricing. You will always know exactly what you're paying per invoice. We never charge fees for setup, invoicing, handling, postage, or any other nickel and diming. Our pricing is crystal clear.
So if you have any questions about our Factoring Program please reach out to us: 800-240-4140
For more information about starting your own trucking business be sure to check out this blog post: Thinking of Starting Your Own Trucking Business?