What is a Merchant Cash Advance?

What is a Merchant Cash Advance?

What is a Merchant Cash Advance?

When a business is unable to qualify for a bank loan or a small business loan, a merchant cash advance is an alternate option that has fewer requirements than the more traditional choices. Merchant cash advances are ideal for businesses that are experiencing short lived financial issues and need an influx of capital as soon as possible. Merchant cash advances are quite different from typical loans, this is why it’s in the best interest of your company to understand how they work and how they differ before any decisions are made.

How does it work?

When a company decides to get a merchant cash advance they are selling future credit card sales to a merchant cash advance provider. The cash advance provider will collect a percentage of each day’s credit card sales until the total amount of the advance is paid back, typically no more than a year. Unlike bank loans, there is no fixed payment plan and no monthly payments to make.

For a business that is in trouble, a merchant cash advance is an appealing option because the payments are based on how well the company is doing on a daily basis. So if a company is having a slow week or month their payments to the cash advance provider will be much lower than during months where their sales are high. The payments are based on a set percentage of credit card sales, so a company won’t have to make large payments when they can’t afford to.

Are Merchant Cash Advances a Good Option for Small Businesses?

Most financing and loan options come with pros and cons and the merchant cash advance is no exception. Sometimes even if there are a lot of issues the advantages still outweigh them. What’s important is choosing the right option for your business. While the merchant cash advance is only one of many different forms of financing for small businesses, in today’s competitive credit market, sometimes you have to take what you can get.

Are merchant cash advances a good option for small business? It depends on who you ask and what small business you’re referring to. The main reason why finance experts argue that merchant cash advances aren’t always the best option is because they are not a loan. This means the providers of the advances aren’t held to the same standards and governed under the same laws and regulations as more traditional lenders. Critics worry that merchant cash advance providers sometimes take advantage of vulnerable small businesses that might be desperate for financing.

While it may be true that certain merchant cash advance providers don’t follow the law, not all providers are out to trick small business owners. In fact, merchant cash advances providers have saved countless small businesses especially during tough economic times. Business loans from banks and other more traditional lenders are not always an option for small business so they must find alternative funding. Small businesses are the heart of the American economy and their survival is integral to the survival of the country’s economy. Relying solely on banks for financing is no longer an option.

If you’ve been rejected for small business loans and bank loans in the past and are looking to apply for a merchant cash advance here are all the pros and cons you need to know.

Advantages of a Merchant Cash Advance

Most small business owners have trouble meeting the requirements of more traditional lenders and have to look for alternative financial help. Business owners with low credit scores, limited business experience and no collateral tend to gravitate towards merchant cash advances to help fund their companies. Here are the advantages of merchant cash advances.

  • Fast cash: Merchant cash advances are a great option for companies that need cash fast, whether it’s to help with working capital or to pay taxes. Advances can be approved within in days and don’t require that much paper work. No collateral or excellent credit is required either, as the cash advance is given against your businesses future credit card sales. Once an advance is paid off you can reapply for another one right away.
  • No monthly payments: Merchant cash advances do not require set monthly payments the same way that bank loans do. Because you pay off the cash advance each day through a percentage of your businesses credit card sales you’ll never have to worry about scrapping together enough money to make a payment on time. If your business goes through a slow period your payments will reflect that.
  • No restrictions: Merchant cash advances don’t typically come with restrictions on how the cash must be used. Unlike more traditional business and bank loans that require detailed business plans that outline how the cash will be used.
  • No due date: There is no final due date that the advance must be paid back by. Once your business has made enough credit card sales to cover the advance and the premium (interest) you’ll be done making payments.

Disadvantages of a Merchant Cash Advances

Merchant cash advances are a great option for certain small businesses, but as with any kind of financing, they do come with some pitfalls.

  • High cost: As with most short term financing, merchant cash advances typically come with higher than average premiums or interest rates. But if you’ve exhausted all other options then the higher premium will be something you have to work with.
  • Not a good alternative for a long term loan: Merchant cash advances are meant to have short terms and therefore are not appropriate alternatives for long term loans. Cash advances are great for when your business needs a small amount of cash for a short period of time. If your company is in trouble or you’re looking to make a serious investment then a merchant cash advance is not a good option for you.

A merchant cash advance is a great option for new and small businesses who need cash quickly and who don’t want to be tied down with a set payment plan. When deciding if a merchant cash advance is the best option for you it’s important that you make an informed decision based on your business’s needs. Choosing a cash advance will allow you to get the money you need without the strict requirements and stressful payment plans. 

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