What is a Merchant Cash Advance?
A merchant cash advance is an alternative financing option to traditional bank loans that enables businesses to receive a lump sum of funding upfront. The business is required to pay back the advance to the merchant cash advance provider with a percentage of its credit card or debit card sales. The term “merchant cash advance” is also associated with financing options for small businesses where short payment terms and small regular payments are involved. The payment term is commonly less than 24 months and the payments are often made each business day.
How a Merchant Cash Advance Works
The merchant cash advance provider gives funds to a business in exchange for a fixed or variable percentage of the business’s daily credit card sales. The amount goes directly from the payment processing company to the lender. This continues until the obligation is fulfilled. Therefore, merchant cash advances aren’t like loans. They are a sale of a portion of a business’s future sales from credit or debit cards. This type of financing is commonly used by businesses that don’t qualify for regular bank loans. It could be because of weak credit ratings or because the business is quite new. In many cases, merchant cash advances are also more expensive because of high interest rates.
The Pros and Cons of Merchant Cash Advances
Before choosing to take out a merchant cash advance, you should consider the pros and cons of this type of loan carefully.
Here are the main advantages of a merchant cash advance for a business owner:
- Strong credit isn’t needed: Merchant cash advance providers don’t rely on a business’s credit history to approve funding. They only need an agreement with the business where they take a percentage of credit card or debit card sales.
- Fast approval: Because credit scores aren’t considered much, MCAs get approved quicker than other financing options like traditional bank loans.
- Quick access to money: The business gets funding quickly. It’s often within 2 business days.
- Minimal documentation needed: As there’s usually no credit check, you only need to present a few of your business documents.
Like any other type of loan or funding solution, MCAs have some drawbacks that you should consider:
- A bit more expensive: MCAs come with higher interest rates in many cases. That’s because they aren’t regulated like regular loans.
- Daily or weekly payments: Frequent payments may affect a business’s cash flow.
- Doesn’t improve credit score: Because MCAs aren’t like business loans, they don’t help in building credit.
- Must accept credit cards: Your business should have a credit card or debit card payment processing to get MCAs.
Is a Merchant Cash Advance Right for Your Business?
An MCA allows your business to quickly acquire funding even with a weak credit rating. It gets approved fast and can be accessed within a short time. But such convenience is likely to come with high interest rates and thus more expensive than some other financing options. If you need quick cash for your business and have bad credit, taking an MCA might be a good option. For more information on merchant cash advances or other financing services, contact our experts at Blursoft!