Mistake 1: Not Understanding the True Cost

What People Think: "It's only a 1.3 factor rate, that's like 30% interest"

 Reality: The effective annual percentage rate is much higher

Example:

• Borrow $10,000, pay back $13,000 (1.3 factor)
• Sounds like 30% total cost
• But you pay it back over 8 months, not 12
• Real annual rate: closer to 45-60%

How to Avoid: Always ask for the APR and compare it to other options.

Mistake 2: Taking Too Much Money

The Temptation: "They approved me for $50,000, so I should take it all" 

The Problem: Higher amounts mean higher daily payments

Real Example: Sarah's bakery made $2,000 daily in card sales. She took a $40,000 advance with 20% holdback.

• Daily payment: $400
• Money left for operations: $1,600
• Not enough to cover rent, payroll, and supplies

Better Approach: Only borrow what you need and can comfortably repay.

Mistake 3: Ignoring Your Cash Flow Cycle

The Mistake: Not considering slow seasons or weekly patterns 

What Happens: You can't make payments during down periods

Example: Tom's landscaping business is slow in winter. He took an advance in October, thinking about busy summer sales. Come January, he had almost no card processing but still owed money.

Smart Move: Time your advance for when you'll have consistent sales to pay it back.

Mistake 4: Stacking Multiple Advances

What It Looks Like: Getting a second advance before paying off the first 

Why People Do It: Need more cash, first advance wasn't enough 

The Danger: Multiple daily payments can crush your cash flow

Example:

• Advance 1: 15% holdback = $150/day
• Advance 2: 12% holdback = $120/day
• Total: 27% of daily sales going to payments
• Often unsustainable

Better Option: Pay off one advance before considering another.

Mistake 5: Not Reading the Fine Print

Common Oversights:

• Personal guarantees (you're personally liable)
• UCC filings (claims on business assets)
• ·Default triggers (what puts you in violation)
• Early payoff restrictions

Real Consequence: Mike thought he could pay off his advance early to save money. His contract had a clause requiring full payment regardless of when he paid off. No savings at all.

Mistake 6: Using Advances for the Wrong Things

Bad Uses:

• Paying off other debt
• Owner salaries or draws
• Long-term investments with slow returns

Good Uses:

• Inventory that sells quickly
• Equipment that generates immediate revenue
• Marketing that brings in customers fast

Why It Matters: You need the money to generate card sales to pay back the advance.

Mistake 7: Not Shopping Around

The Mistake: Taking the first offer you get Why It's Bad: Rates and terms vary widely between lenders

Example:

• Lender A: 1.4 factor rate, 20% holdback
• Lender B: 1.25 factor rate, 15% holdback
• Difference: Thousands of dollars in total cost

Smart Approach: Get at least 3 quotes before deciding.

Mistake 8: Lying About Sales Volume

The Temptation: Inflating your numbers to get approved for more money The Reality: They'll find out from your processing statements The Consequence: Immediate default and demand for full payment

Be Honest: Accurate numbers lead to advances you can actually handle.

Mistake 9: Not Having a Repayment Plan

The Problem: Taking money without knowing how you'll pay it back What Goes Wrong: Daily payments surprise you and hurt operations

Before You Sign:

• Calculate your likely daily payment
• Make sure you can cover rent, payroll, and supplies
• Have a plan for what happens if sales drop

Mistake 10: Ignoring Alternative Options

Common Situation: Only looking at merchant advances Other Options to Consider:

• SBA loans (cheaper but slower)
• Equipment financing
• Business lines of credit
• Invoice factoring

Why It Matters: Merchant advances should be for urgent situations, not routine financing.

How to Avoid These Mistakes

Do Your Math

• Understand total cost
• Calculate daily payments
• Know your break-even point

Read Everything

• Factor rates and holdback percentages
• Personal guarantee requirements
• Default conditions

Have a Plan

• Know exactly what you'll use the money for
• Understand how it will generate revenue
• Plan for different sales scenarios

Shop Around

• Get multiple quotes
• Compare total costs, not just rates
• Ask about all fees and charges

Red Flags That Should Stop You

• Pressure to sign immediately
• Promises that seem too good to be true
• Unwillingness to explain terms clearly
• Rates significantly better than competitors
• No clear explanation of total costs

Protect Your Business with These Practical Tips

Running a business can be exciting and gratifying, but it also poses hazards. Protecting your business is essential to ensure its success and longevity. Here are some practical tips to help you keep your business safe and secure.

Keep Your Financial Records Organized

Good record-keeping is the foundation of a secure business. Keep track of all your expenses, sales, and important documents. This helps you spot problems early and makes tax time easier.

Use Strong Passwords and Security Measures

Cyber security is more important than ever. Use strong, unique passwords for your business accounts. Consider adding two-factor authentication and regularly update your software to protect against hackers.

Get the Right Insurance

Insurance protects your business from unexpected events such as accidents, theft, or natural catastrophes. Talk to an insurance agent to find coverage that fits your needs.

Protect Your Intellectual Property

Your ideas, trademarks, and branding are valuable. Register trademarks and patents where necessary to prevent others from copying or stealing your creations.

Have a Clear Business Plan

A solid plan directs your business decisions and prepares you for problems. Know your target market, competitors, and goals. Planning ahead reduces risks.

Hire Trustworthy Employees

Your team is vital to your business. Conduct background checks and provide proper training. Having reliable employees reduces the chance of theft or mistakes.

Stay Compliant with Laws and Regulations

Make sure your business follows local laws, tax rules, and industry regulations. Staying compliant helps you avoid fines and legal issues.

Backup Your Data Regularly

Save copies of important business data on secure cloud services or external drives. Regular backups prevent data loss if your system is damaged or hacked.

Build Good Relationships with Customers and Suppliers

Healthy relationships can protect your business in tough times. Good communication and trust can help you navigate challenges more smoothly.

Keep an Eye on Your Business Credit

Monitoring your business credit score helps you spot issues early and improves your chances of getting loans or better deals.

Bottom Line

Protecting your business doesn’t have to be complicated. With these simple tips, you can reduce risks and build a strong foundation for your success. Stay proactive, stay prepared, and keep your business safe!

What Now?

Merchant advances can help your business, but only if you use them smart. Avoid these common mistakes and you'll be much more likely to have a positive experience.

Remember: This is expensive money. Only use it when you have a clear plan to pay it back quickly.