Using Home Equity to Refinance a Merchant Cash Advance

A merchant cash advance (MCA) can provide quick funding for a business, but it can also come with high costs and rigid repayment terms. Refinancing an MCA with a home equity loan or line of credit may offer more favorable rates and flexibility. Here’s what business owners need to know about using home equity to refinance merchant cash advances.What is a Merchant Cash Advance?A merchant cash advance provides a business with a lump sum of capital in exchange for a percentage of future credit card and/or debit card sales. It is not technically a loan, so MCAs are not subject to the same regulations.MCAs are easy to qualify for because they are unsecured, short-term financing based on a business‘s expected credit card receipts, not its credit score or assets. The funds can be used for any business purpose – making payroll, stocking inventory, marketing, etc.

The Costs of Merchant Cash Advances

While fast and readily available, merchant cash advances come at a steep price:

  • Advance Rate – An MCA provider will advance only a percentage of the total amount, usually around 80-90%. So a $100,000 advance would require the business to pay back around $120,000.
  • Factoring Rate – This is the fixed percentage of daily credit/debit card sales that gets deducted and goes toward repaying the MCA. Rates typically range from 15-45%.
  • Effective APR – When factoring rates and advance rates are combined, the APR on an MCA can be 50-400%.

This high cost of capital makes MCAs best suited as short term, emergency funding. But if a business gets caught in a cycle of taking out multiple MCAs, the high rates and aggressive collections tactics used by some MCA providers can become unmanageable.Refinancing an MCA with a Home Equity Loan

Tapping home equity to refinance an MCA involves taking out a loan secured by the equity in your home. Rates on home equity loans currently average around 5% – significantly lower than MCA rates.

Pros of Using Home Equity to Refinance an MCA:

  • Lower Interest Rate – Home equity rates are typically 1/10th the cost of an MCA. This greatly reduces the total interest paid.
  • Fixed Payments – A home equity loan has a set monthly principal and interest payment, rather than the daily debits of an MCA. This allows for better cash flow planning.
  • Flexible Terms – Home equity loans can have terms ranging from 5-30 years. A longer term keeps payments manageable.
  • Tax Deductible – Within IRS limits, interest paid on home equity debt used for business purposes may be tax deductible. MCA interest is not.

Cons of Using Home Equity to Refinance an MCA:

  • Home at Risk – If the loan goes into default, the lender can foreclose and force a sale of the home to get repaid.
  • Closing Costs – Upfront fees for processing the home equity loan can reach 5% of the amount borrowed.
  • Prepayment Penalties – Home equity loans often have charges for paying off the balance early. Need to refinance again? That’ll cost you.
  • Credit Qualifications – While not as strict as regular business loans, home equity lenders do check personal credit, income and home appraisal. Those with recent credit issues may not qualify.

As long as the business owner understands the risks, home equity refinancing can be a viable route to replacing short-term MCA debt with a more manageable fixed-rate installment loan.

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