If you need funding for your small business, you may want to consider applying for a merchant cash advance. Business owners find this to be a convenient solution when they need to raise capital quickly to cover expenses or invest in more products, more square footage, or other expenses that can help their company grow.
Most cash advances are short-term loans for businesses to get quick working capital. They are easily accessible, and they can be used in a wide variety of businesses. You can click here for a more in-depth definition of a merchant cash advance. If you use this type of financing, your company will sell a portion of its future credit card sales in exchange for cash.
What is the difference between merchant cash advances and other business loans?
The risk assessment in merchant cash advances is based on daily and monthly credit card sales, your business’s credit score, and the length of time you have owned your business. This information determines the ability of the business to repay the advance. Payment of the cash advance is made by the merchant cash advance company automatically by deducting a percentage of your business’s credit card sales.
Other types of business loans, on the other hand, can be repaid through other account sources instead of being automatically detected. The annual percentage rate and fees of merchant cash advances make the total loan cost-prohibitive than other types of business loans. Compared to the traditional loans whose agreements are held by the same low merchant cash advances, interest rates on an MCA can increase to 38%.
Is a merchant cash advance good financing for your business?
An MCA is a good fit for small businesses, as the payment is only needed when the business makes sales paid through a credit card. For businesses struggling with little credit that have strong sales, an MCA may be the best option.
The benefits of choosing MCA funding
These are the reasons you should consider using a merchant cash advance to fund your business.
It is a faster way of getting money
Merchant cash advance companies do not require a lot of paperwork. You can typically access your cash advance within a week. The only thing lenders check is your daily credit card receipts to show your payment capabilities.
It doesn’t require collateral
While traditional loans require collateral, a merchant cash advance does not. If you are unable to repay the loan, your business and personal assets cannot be taken away by the lender. The merchant cash advance provider will only need a written agreement showing your personal responsibility and dedication to repay the advance. These documents act as a personal guarantee.
You can pay less when sales are low
The payment of this type of advance is dependent on the performance of your business. The repayment percentage is based on the sales made to ensure that the amount of money paid is less when the sales are low.
The cons of using MCA financing
These are some of the reasons you might want to steer clear of a merchant cash advance.
Early repayment does not earn you benefits
Traditional business loans pay less interest when you make an early repayment. On the other hand, an MCA does not provide any interest savings even when you pay early. All the agreed-upon fees must be paid, and you can get a prepayment penalty for early repayment.
The annual percentage rate of payment increases with higher sales
The annual percentage rate of your merchant cash advance is dependent on the total fee paid and how fast you can pay the loan. Weak sales spread out your payment for a longer length of time as your APR declines.
What your business needs to qualify
In order to qualify for a merchant cash advance, your company must meet the following conditions:
- Your business should not have had a prior bankruptcy
- Your business should have existed for less than one year
- Your business should be processing credit card payments for its customers
MCA Alternatives
Before considering merchant cash advance financing, it’s important to look for other MCA alternatives for your small business. There are various small business loans given by online lenders in case you don’t have collateral. These alternatives may offer better payment terms and competitive APRs.
