The increasing number of business verticals is the reason, today, there are financing options and business loans for start-ups, more than ever before. Among all other options available, Merchant Cash Advances(MCAs) and short-term loans are often considered the ideal ones for small to medium-sized businesses. This is because, many entrepreneurs, these days, look for same-day loan approvals to cope with emergencies like equipment breakdown, urgent need to hire more employees/workers or purchase extra inventories to meet the sudden upsurge of demand etc., and MCA lenders give approval within 24 hours of application and disburse the amount in the next 48-72 hours. Alternative finances like MCAs often turn out to be extremely beneficial for start-ups with low credit scores and short trade histories. But, one must always be thoroughly informed about the financing option he/she is opting for, to avoid falling into certain traps, which are quite prevalent in the case of MCAs and term loans. Today, all aspiring entrepreneurs know how to get a start-up business loan. But, how many have a clear understanding of the pitfalls that alternative finances can lead to, if they are not scrutinized properly before application?

Double Dipping is one such trap that impacts the borrower at the time of refinancing or renewing the existing finance, as it involves carrying over interest from the existing cash advance to the renewed one. Double dipping is a complex practice that most borrowers fail to understand. An MCA provider or short-term lender, generally, lends an additional advance only when the initial advance is entirely repaid. But, sometimes, the lenders try to manipulate the borrowers to opt for refinancing and use the funds in paying off the outstanding amount, if any. Double Dipping, also known as “Interest on Interest” or “Interest Acceleration”, is a practice that causes a considerable financial loss to the borrower, throughout the loan tenure. In the case of Double Dipping, the borrower ends up paying double for the same amount. Hence, before signing an agreement, one must make sure the MCA or short-term loan provider, he/she is choosing, doesn’t practice Double Dipping. 

      To understand the concept of Double Dipping better, one must learn to calculate the merchant cash advance and short-term loan borrowing fees. MCAs and STLs(Short-Term Loans) calculate their fees using a multiplier called “Factor Rate”, which mostly ranges between 1.1 and 1.6. The total repayment amount is calculated by multiplying the borrowed amount by the Factor Rate. The repayment amount, in the case of MCAs and STLs, doesn’t change irrespective of the time required to repay the advance. Factor Rates help the borrower calculate the borrowing fees. But, Factor Rates may carry a hidden cost, if the borrower refinances or renews the advance. As finances with Factor Rates have a pre-decided payable amount, the lender uses a portion of the new funds to pay off the remaining fee along with the principal, in the case of renewals. Hence, eventually, the financer drives up the cost of the new loan, and the borrower ends up paying interest on top of interest. For example, a borrower has an existing loan, the original amount of which is $100,000 and the total payable amount is $115,000, over 12 months. Halfway through the term of the loan, the borrower decides to renew the existing one for an additional $50,000. In this case, the current balance is $57,500, of which, $50,000 is the principal and $7,500 is the remaining interest. Hence, the new balance, including the renewal, will be $115,000 ($57,500 + $50,000+$7,500). However, a double dipper will include the remaining interest in the final total and then apply new interest to the new total amount, which is $123,625. In this case, the cost of double dipping to the borrower is $8,625 ($123,625 – $115,000).

      How To Avoid Double Dipping?

      Double Dipping usually costs a borrower anywhere between $3,000 to more than $11,000, approximately, for each renewal. Borrowers often get stuck in a debt cycle, when they opt for refinancing just to pay the debt of the existing finance, and not to grow their businesses. Hence, a borrower, who already has borrowed once and is eager to renew the existing advance or loan, should ask the lender to explain the proceeds he/she will receive upon closing the transaction on his/her payback amount, confirm that the unpaid interest, factor income, contract amount, margin income from the original loan or advance is not added to the new outstanding balance and not deducted from the proceeds at renewal, and ensure that all the outstanding fees or interest are waived off. Extensively questioning the lender will avert the scope of massive financial loss of the borrower.