Merchant cash advance is a means of short-term financing that caters to small business owners that need cash immediately. It enables business owners that accept payments via credit cards or other receivables or payment streams to acquire advance funds regularly through the merchant account.
Contrary to the name, merchant cash advance is not a loan. Rather, it is an advance based on future credit card sales or revenues of a business. You need to apply for it to be able to have advance funds deposited in your account quickly.
Before you can qualify for merchant cash advance, providers of this service will carry out an evaluation focusing on the weight and risk criteria in a different manner from how traditional bankers do. For instance, they will assess your daily receivables or even credit card receipts to determine the ability of your business to pay back the money advanced in a timely manner.
The cost of Merchant Cash Advance Loans
Generally, the rates offered on merchant cash advance loans are higher than the loan options for small businesses. In fact, the total cost could just be in triple numbers that could affect the cash flow of your business.
MCA providers may approve an advance for your business even if it does not qualify for a business loan but has a stable influx of payments being made with credit cards. Thus, you need to understand these the terms so that you make an informed decision that significantly affects your potential ROI. Keep in mind that if you don’t think it out well, you could end up in a debt trap that would either force you to refinance with another MCA or simply file for bankruptcy. MCA should be used as a last resort.
Advantages of Merchant Cash Advance
Some of the top advantages of MCA include the following:
- You do not need collateral. Should your business fail and the restitution of the advance is not made in full, your assets will not be at risk as is the case with bank loans. If anything, there is no legal liability.
- Merchant cash advance does not require you to make fixed monthly payments.
- Repayment of the cash advanced is usually made automatically as per your credit card transactions, eliminating the possibility of late charges as is often the case with bank loans.
- Improved cash flow.
- Minimal paperwork.
- A great alternative to a bank loan.
- It is almost instantaneous.
Disadvantages of Merchant Cash Advance
The major disadvantage of merchant cash advance is that it is more costly compared to traditional financing. This is because the advance you apply for will usually last less than a year and as such, the firms lending you are not bound by regulations on interest rates that guide traditional lenders.
Other potential disadvantages include the fact that some contracts will not allow you to switch credit card processors. Therefore, if you are not satisfied with the credit card processor, then you will have to stick with them. In addition, you cannot encourage your customers to pay in cash so that their sales do not go to MCA as this is considered a breach of the contract.
Well, you will need to carefully evaluate your needs before signing up for MCA so that you do not end up paying more and hurting the cash flow of your business.
ABC is a financial advisor specializing in small business. He has helped more than one hundred small businesses put their financials in order. He enjoys blogging on the financial solutions that are available for small businesses such as merchant cash advance loans.