If you’re seeking quick access to cash for your small business, a merchant cash advance (MCA) might be your perfect solution. MCAs are a great alternative to traditional loans because of their short approval processes, no collateral needed, and lenient credit requirements.
A merchant cash advance isn’t a loan. Instead, it’s a funding solution that business owners can borrow and pay back using a percentage of their future debit and credit card sales. When you apply for a merchant cash advance, the lender will look at your credit card receipts to evaluate your eligibility to repay the advance amount based on your daily credit card sales or debit card sales.
As with any other funding solution, merchant cash advances have advantages and disadvantages. Therefore, it’s wise to weigh the pros and cons of using a merchant cash advance to determine if it’s the right option for your business needs.
Small Business Loans
Should You Get a Merchant Cash Advance for Your Business?
The decision of whether to get a merchant cash advance entirely depends on the current financial situation of your business. If you need fast access to working capital to manage your cash flow shortages or cover any other short-term business expense, an MCA might be the solution to your problems.
Generally, merchant cash advances are a great funding solution for business owners with credit card transactions. This is because you’ll use your future credit card sales to pay back the borrowed money. It’s also ideal for businesses seeking short-term financing and who don’t have enough assets to serve as collateral.
MCAs are also an ideal option for businesses with less-than-perfect credit. While credit score requirements vary by lender, most merchant cash advance companies are more interested in your credit card transactions.
Pros of Merchant Advance
A merchant cash advance comes with several benefits, including:
Fast Access to Cash
One major benefit of using MCAs is the quick access to funding. Unlike traditional bank loans with lengthy approval processes that may take weeks to get the funds, it takes as little as a few hours or a couple of days to receive an MCA, depending on the lender. Most lenders will only look at your credit card receipts to determine your capability to repay the funds.
If you have a short-term project or an unexpected business expense, a merchant cash advance can be an excellent financing option for your needs.
Flexible Requirements and Repayment
Merchant cash advances don’t have the rigorous eligibility requirements of traditional loans. All you need is enough credit card receipts to pay back the borrowed funds.
Additionally, MCAs have flexible repayment schedules. For instance, you can adjust your holdback period if you’re going through a slow sales period. You also don’t need collateral to back up the lump sum amount of money you borrow.
Doesn’t Need a High Credit Score
Merchant cash advance companies are also willing to work with small business owners with low credit scores. What matters most is credit card sales. Since the lender takes a percentage of sales, you need to assure the lender that you have enough daily credit card sales or monthly credit card sales.
No Collateral Required
Most business financing options require collateral, typically an asset that the lender can seize and sell when you default on your loan payments. However, with a merchant cash advance, you don’t need collateral to back up your financing.
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Cons of Merchant Advance
Like any other business financing option, merchant cash advances have drawbacks too.
Expensive (High APR)
Merchant cash advances are typically expensive compared to other business loans. The annual percentage rate (APR) for MCAs can go up to 200%, depending on the lender, the size of the cash advance, fees, and the repayment period. Additionally, it’s difficult to determine when you can pay off the advance in full due to factor rates.
May Hurt Cash Flow
Taking out an MCA may hurt your business cash flow, depending on how you agree to repay the advance. For example, if you opt for a fixed payment schedule, a set amount of money will move out of your bank account daily, weekly, or monthly. In slower sales periods, you may experience cash flow shortages, which may halt operations.
Doesn’t Help Build Credit (Some Can Make It Worse)
While some business loans help build or rebuild credit, merchant cash advances don’t. Since MCAs are not loans, lenders do not report payments to credit reporting agencies, so they won’t help you build credit. Startups and small businesses looking to build credit may want to consider other types of business financing.
Higher Sales Also Means Faster Payback
One significant aspect MCA providers look at when evaluating the eligibility for a cash advance is credit card sales. If your sales go up, you can pay off your advance early. Paying it off early comes with trade-offs, though, increased APRs.
No Savings If You Pre-pay
Unlike traditional amortized loans that may help you save on interest if you pay off your loan early, there’s no benefit to repaying your MCAs early. In fact, you may be penalized for paying back the advance ahead of schedule since your APR increases.
MCA Contracts are Complex
Merchant cash advance contracts can be complicated, especially when it comes to payments. Their factor rates and repayment schedules are based on a percentage of sales, which can be confusing.
Plus, most merchant cash advance providers do not include APRs in their agreements. This makes it even more challenging since borrowers can’t compare MCAs with other business financing options.
Alternatives to Merchant Cash Advance
Before committing to a merchant cash advance, it’s always wise to seek out alternative forms of business financing. If you don’t qualify for an MCA or it doesn’t appeal to you in one way or another, here are some options to consider.
Revolving Line of Credit
A revolving line of credit is a type of loan that allows you to borrow money repeatedly up to a certain credit limit. Once your credit limit is reached and paid off your balance in full, you can borrow again. The good thing about a revolving line of credit is that you only pay interest on what you borrow.
Business Credit Card
Business credit cards are tailored for businesses rather than individuals’ personal use. They are available to all businesses regardless of size or industry. Like personal credit cards, they can help business owners build credit. One major drawback of business credit cards is that they have higher interest rates than traditional loans.
Invoice financing is a short-term form of financing that businesses can borrow against the amount of due invoices issued to customers. The invoice themselves serves as collateral for the amount you borrow; thus, it is often easier to qualify for invoice financing.
A business term loan allows you to get a lump sum amount of money and repay the principal plus interest over a set period of time. Typically, term loans are ideal for businesses seeking financing to cover short-term expenses, such as purchasing equipment or any other asset to keep the business going.
Working Capital Loan
A working capital loan is a short-term loan used by businesses to finance everyday operations. This financing can be used to pay rent, cover payroll, fill cash flow gaps, and any other business expense.
Are you seeking a business loan and unsure whether a merchant cash advance is right for your business? You may want to consider other business financing options from a reputable lender like Biz2credit.