If you need fast cash to cover business expenses, you may have considered a business cash advance. But is it the best option, or should you explore other alternatives? Merchant cash advances are costly compared to other types of business financing. That said, they could be ideal for small business owners in some situations.
Read on to learn more about how they work, essential pros and cons to keep in mind, what you’ll need to qualify for funding and how to decide if a business cash advance is right for your company.
What is a Business Cash Advance?
A business cash advance is a type of business financing that lets you access a portion of your projected future credit and debit card sales. Repayment is made through automated fixed daily or weekly withdrawals from your business bank account initiated by the merchant cash advance company. In addition, some providers may choose to collect payments through fixed bank account withdrawals for the same amount.
How Does it Differ from a Business Loan?
Both are forms of business financing, but a merchant cash advance technically isn’t a loan. Here are some key differences to be aware of:
- Term: Business cash advances are more of a short-term funding solution. They’re designed to cover immediate expenses and fill cash flow voids. But business loans are more long-term and can help fund larger purchases or growth and expansion efforts.
- Borrowing costs: Business cash advances come with a factor rate, but business loans generally come with a fixed interest rate. You can expect to pay steeper borrowing costs with merchant cash advances, hence the intention for them to be used as short-term solutions.
- Approval: Lenders offering traditional business loans evaluate several factors, including the annual revenues, time in business and creditworthiness, before making lending decisions. However, business cash advance approvals are based on the company’s projected sales volume. So, creditworthiness is not necessarily a deal-breaker.
- Repayment: Business cash advances are payable in daily or weekly installments. The lender automatically withholds payment from a portion of your debit or credit card sales until the balance is paid in full. By contrast, traditional business loans are payable in equal monthly installments over a set period of time.
- Funding amount: The amount you can get with a merchant cash advance correlates to your credit card sales.
The chart below also provides an overview of how business cash advances and business loans differ:
| Business Cash Advances | Business Loans |
| Short-term funding solution | Long-term loans |
| Factor rate | Fixed interest rate |
| Approval based on future sales | Approval based on financial health and creditworthiness |
| Payments are based on sales volume (remitted daily or weekly) | Fixed monthly payments |
| Smaller funding amounts | Larger loan amounts |
How Does a Business Cash Advance Work?
As mentioned above, MCA providers advance your company’s future sales to you. You’ll repay this amount along with a factor fee that’s built into the payments.
Advance Amount
Although the advance amount is based on projected sales volume, the exact amount you’ll qualify for varies by merchant cash advance provider. Many also evaluate your industry, time in business and financial health when deciding how much to advance your company.
Payback Amount
There are two ways payment is collected on business cash advances:
- Percentage of card sales: Most business cash advances follow this repayment structure. The merchant cash advance company withdraws a portion of credit and debit card sales daily or weekly until you no longer owe. In most instances, the repayment period is between three and 18 months. The factor fee is built into the payments.
- Automated bank account withdrawals: Some business cash advance companies collect fixed payments daily or weekly. The payment amount is based on the projected monthly revenue and doesn’t change over time, even if the business is slow.
Holdback
This term refers to the percentage of daily or weekly debit or credit card sales that are applied to your outstanding balance. It’s generally between 5 and 20 percent of your sales volume and remains fixed for the entire repayment period.
To illustrate, assume your daily sales volume is $1,000 and your holdback amount is 15 percent. The merchant cash advance provider would “hold back” or collect $150, and you’ll keep the remaining $850 minus any applicable factor fees. You should also deduct any merchant processing fees assessed by the payment processing company from this figure.
If your sales volume is higher than expected, you’ll repay the business cash advance sooner than anticipated. But if you experience a downturn in business, expect a lengthier repayment period.
The Pros and Cons of a Business Cash Advance
Before applying for a business cash advance, evaluate the benefits and drawbacks of this funding option.
Pros of a Business Cash Advance
- You’ll enjoy a streamlined application process and get a quick lending decision with most merchant cash advance companies.
- You don’t need collateral to get approved for a business cash advance.
- You don’t need perfect credit to qualify for a merchant cash advance.
- You won’t need to provide a mountain of paperwork to be considered for funding.
- You’ll receive funding quickly – generally within a few days.
- Your payments are based on sales volume, making the payments more affordable.
- You won’t incur prepayment penalties if you decide to repay the advance early.
Cons of a Business Cash Advance
- You’ll incur steep borrowing costs to access fast cash.
- You may not qualify for the amount of funding you need to fill cash flow voids or to cover another business-related expense.
- You could get a far shorter repayment period compared to a traditional business loan.
- You could be subject to usage restrictions with select business cash advance providers.
- Your personal credit score could be negatively impacted if timely repayment isn’t made.
- You must agree to daily or weekly withdrawals from your business bank account.
- You won’t build business credit.
How to Qualify for a Business Cash Advance
The eligibility guidelines vary by provider. However, most require the following:
- Basic information about your company
- An active business checking account
- Up to six months of business bank statements
- Up to six months of credit card or merchant account processing statements
Is a Business Cash Advance Right for Your Business?
A business cash advance could be ideal for your business if:
- You have limited options and need fast cash.
- You have a low credit score or little to no credit history.
- You don’t have company assets that can be used as collateral to secure other forms of business financing.
- You process a sizable amount of credit and debit card transactions.
However, you want to steer clear if:
- You can qualify for other forms of business financing with more attractive terms.
- Your company is already saddled with debt.
- Your company’s projected revenue is minimal.
How to Get Business Cash Advance
Start by researching several lenders and comparing repayment options, factor rates, other fees and reputations to compile a list of options. Once you’ve narrowed down your list, apply with your top three choices to view terms and borrowing costs. Then, select the best fit and be sure to read the fine print before signing the financing agreement and receiving funding.
If you use an online lending marketplace to find the best options, here’s what to expect:
- Complete a brief questionnaire.
- Get matched with merchant cash advance companies that could be a good fit.
- Finalize the merchant cash advance application.
- Receive your formal approval and access the funds in your business bank account. Some merchant cash advance providers send funding as soon as 24 hours from the time of final approval.
