Merchant cash advances are a great option for business owners looking for fast cash to improve and help grow their company. Cash advances and business loans are similar in that they both supply businesses with an agreed upon amount of capital, other than that the two financing options are quite different. Merchant cash advances are the perfect fit for companies who only need a small amount of cash to cover a short term expense and can repay the advance as soon as possible.
When deciding whether or not a merchant cash advance is the best choice for your business it’s important to understand that there are risks involved, just like most types of business funding. There are a variety of different opinions about the suitability of merchant cash advances; the best way to make a decision that will benefit your business is to be as informed as possible about all the pros and cons. Below is all the information you should know about merchant cash advances and how they differ from typical bank loans and business loans.
What is a Merchant Cash Advance?
Merchant cash advance providers supply businesses with the cash they need based on their daily credit card sales. A company that has strong credit card sales is the perfect candidate for a merchant cash advance. Cash advance providers don’t technically loan businesses money, rather they purchase the potential future sales of a business. To pay back a merchant cash advance you will give your cash advance provider an agreed upon percentage of your business’s daily credit card sales, plus a premium (interest) until the amount is fully paid back. This should take on longer than a year as merchant cash advance premiums can sometimes be quite high.
Merchant cash advance providers are not governed under the same rules, laws and procedures as banks and other financial institutions. This is both good and bad for business owners looking to apply for a merchant cash advance. Cash advances can be obtained rather quickly but they also have above average interest rates or premiums. Since cash advances are a short term financing options the high premiums should not discourage you too much from apply for one. The different and less strict procedures make merchant cash advances a great option for businesses that are unable to qualify for a typical business bank loan. Cash advance providers are drawn towards candidates in the service industry, businesses who conduct the majority of their sales through credit cards but might not have good credit or enough collateral for an average business loan.
How does a Merchant Cash Advance Differ from a Business Loan?
Deciding what type of financial funding is best for you and your company can feel like an impossible choice. Now that you know exactly what a merchant cash advance is your next step should be to understand how they’re different from more traditional financial options.
- Time. A merchant cash advance is overall a less complicated and involved option, it takes less time to be approved so the money can be in your hands as soon as possible.
- Approval rates. It’s significantly easier to be approved for a merchant cash advance than a traditional bank loan, therefore businesses having difficulty finding funding should consider apply for one.
- Collateral. Collateral is not a concern for merchant cash advance providers.
- Restrictions. There are not restrictions on how you use the money.
- Repayment. Because your payments are based on credit card sales, there is no payment plan or final due date. This makes a cash advance less stressful than a typical business loan.
- Experience. Your business only needs to have been open for a year unlike a bank loan that usually requires 5 years.
What are the Pros and Cons of a Merchant Cash Advance?
All bank loans, financing options and funding opportunities come with risks and there’s usually no way around them. It’s important that you weigh the advantages and the disadvantages and decide what you can and cannot deal with. Here are the pros and cons of a merchant cash advance.
- Approval rate is higher and requirements are simple and straight forward.
- No credit score or history needs to be provided.
- Approval is based on your business’s past credit card sales.
- Slow month for sales means your payments will be smaller.
- Perfect for short term financial needs.
- No detailed business plan is required for approval.
- Interest rates (premiums) can be higher than a typical loan.
- Not the best option for all companies.
- Not to be used as a substitute for a long term loan.
Obtaining the right kind of financing for your business is one of, if not the most important steps towards running a successful company. As with any type of business or financial decision there will be some risks involved, it’s up to you to decide what risks are worth the trouble. A merchant cash advance is, just like all other finance options, imperfect, but is a great alternative for business owners who need access to capital quickly and efficiently.