What is a Merchant Cash Advance for Small Business?

October 12, 2016 / Reading: 3 minutes

Businesses are looking for alternative ways to inject cash or restructure their business because bank loans are harder to acquire these days. A merchant cash advance is a type of cash advance using your future business as collateral.

The reason why this is such an appealing proposition is because businesses that have credit problems or can’t afford constrained loan terms with high interest rates. Instead, merchant cash advances are paid off by essentially taking a royalty from your credit card sales until all the money is paid back.

Businesses who want to borrow a large sum of money to cover a calculated bump in the road will find this to be worth the temporary loss in profits. In contrast, it may not be the best option for businesses who do not have a reliable revenue stream .

Pros of Merchant Cash Advances

This alternative form of refinancing has been trending in recent years since it offers a variety of advantages. Because of this, there are more and more lenders popping up, making it easier to access.

  • Lower qualification pre-reqs: You can be a candidate despite poor FICO scores and regardless of the fact that you’ve been turned down for an advance before.
  • Reimbursement determined by your own success: Since the loan specialist deducts installments from your credit transactions, whether you have a moderate sales day, your repayment scales with your success, not as a flat percentage rate that could choke the business.
  • No settled reimbursement term: Money is just deducted from your day to day receipts, until you’ve met your reimbursement obligations.

Cons of Merchant Cash Advances

Outside of the obvious need for a decent history of doing business via credit cards, merchant cash advances come with their own drawbacks, too. Because they are convenient and are tied to your businesses cash flow, it can also present a deceptively large risk to the future success of your business if the money borrowed is not immediately boosting profit margins or alike.

It is also commonly higher in overall fees than a typical small business loan, if repaid in a timely manner. Merchant cash advances don’t come with alternative means to repay the loan outside of how fast you can process credit card sales. You definitely need to practice a bit more discipline when handling your expenses with this type of financing.

Final Thoughts on Financing Options

Provided that you meet all requirements for a formal business credit with a low rate, you really should try to secure one over any other form of lending. With that said, if you battle with securing a business advance, are dealing with high fees/rates, or unfavorable terms, a merchant cash advance might be a decent option for you.

In the event that you are ready to start the qualification process and need to find a lender, you can begin by reaching out to your charge card provider, or utilize a Visa handling organization index to find loan services. Do your research on each company online first before getting trapped into a discussion on their terms.