Understanding Business Loans and Merchant Cash Advances.
Merchant Cash Advance.
Is the lump sum payment made to a business or an organization to exchange future debit cards or credit cards for an agreed-upon percentage. One should note that a company does not owe the lender any amount until they generate sales.
Merchant Cash Advances may mean short-term business loans or purchases of future credit card sales.
MCA is characterized by small payment amounts made in short time intervals or amounts paid on each business activity.
Retail businesses that can not access bank loans often opt for Merchant Cash Advances.
Merchant Cash Advances also act as external funding to small businesses that can’t afford to fund an innovation or expansion project independently.
In this case, a business gets an amount of cash upfront and agrees to return the borrowed amount of money over an agreed period and with interest.
Deposits of the loan sum plus interest will be paid monthly or as agreed by the two parties.
If a business wants to shorten the period it takes to clear the loan, it will be required to deposit large amounts of money. Long periods of repayment mean reduced deposits. However, the payback sum will increase.
Advantages of Merchant Cash Advance.
If a business has an urgent need for extra cash, MCA can be helpful.
Other advantages of merchant cash advances include:
1-No Security or Upfront collateral needed.
Cash advances companies don’t ask for collateral or assets to act as security from small businesses. A good sales track record is all the business has to prove. They also need to show a strong potential of making future sales.
2-Easy To Get.
Merchant Cash Advances have a very high approval rate, and getting them is pretty effortless. The small business will, however, have to produce the following documents:
1-A government ID.
2-An application form indicating the amount you are applying for.
3-Previous bank statements and transactions.
4-Company registration certificate.
Other companies may require more documents depending on their policy.
Businesses can access cash advances very easily. It is their most significant advantage. In less than a week or a couple of days, you will be able to secure your cash advance from any respective company.
MCA offers a quick turnaround, which can be very useful during tough times or when a business needs to make unplanned purchases without enough cash.
4-A Perfect Credit Score Isn’t Needed.
For business owners with little or no credit information, cash advances will save them a great deal. All they need to show is a good track record of sales and the potential to make more sales in the future.
Another advantage is that the amount collected by the provider changes with time. It helps the merchant to manage their cash flow and run the business effectively. During a low season, the provider reduces the amounts collected, and during high seasons, the provider increases.
Disadvantages of Merchant Cash Advances.
1- It is risky to finance future sales.
The future has always been difficult to predict. A business may get a cash advance and later on see their sales decrease. It increases the debt burden as the interest rates are relatively high.
2-Misappropriation of funds.
Merchant cash advances are often misused. When acquiring the funds, businesses provided no security hence a sense of safety, leaving the company with room to lazy around. The longer they take, the higher the interests spikes.
3- It cant be used for the long term.
Cash advances are scheduled for short durations, approximately three-fifteen months. The short time frames make them even more expensive and an uphill task paying back.
Only use cash advances to solve specific financial problems and ensure the business will generate enough to repay the principal amount and accrued interests.
Business loans are paid back over a predetermined period, while Merchant Cash Advances are paid back based on credit card sales and the daily or monthly credit card transactions.
Understanding the difference between business loans and Merchant cash advances will help you make an informed decision and help you choose the right solution to solve your financial problems.