What is a Merchant Cash Advance?

There is a wide variety of business finance application options available on the market today. Some options are harder to get approved for. When a company finds that they are either unable to secure a business loan, or this approach does not fit their unique needs, companies often resort to a merchant cash advance solution. In many ways, this step is similar to a loan, but the qualification process is generally much easier, the funds are available faster, and unlike a traditional loan, merchant cash advances are not ‘technically’ borrowing money from a lender.

What Are Merchant Cash Advances?

A merchant cash advance is a loan of sorts that allows a business to borrow funds against earnings they expect to gain in the future. You can consider this as a short-term business loan or credit card payment. In order to qualify, a borrower needs to provide information about their capital review, annual revenues, financial history, business bank statement, and past earnings so that the lender is aware of what sort of income can be expected. They are not interested in their business credit score but more in the credit card processing statement. The sum of money that the applicant approved by the merchant cash advance provider is based on these numbers.

Because merchant cash advances differ from standard business loans, collateral is not usually required for approval, and typically, it takes only a day or two to receive funds once approved. The periodic payment is within weeks or months for this alternative business funding method. 

Merchant Cash Advance Details

A merchant cash advance can vary in terms of sums available, length of the loan, interest rates, and additional details. Typically, a borrower can be approved for a merchant cash advance that totals a lump sum upfront between $5,000 and $200,000. Terms are usually set to where the loan is expected to be repaid in one to two years, and interest rates tend to be somewhat high for an MCA. Though they can vary, interest rates of around 18% are ideal.

While MCAs are often lumped in with business loans, they do not technically count as a business loan option. A cash advance is simply a method of obtaining money that a business owner plans to have in the near future. Much like a standard payday advance, merchant cash advance companies make future funds available in the present. 

It should be noted that in order to qualify for this type of business funding, the business in question usually needs to have a steady volume of future credit card sales and debit card sales. 

This option is often chosen when a business needs to access funds right away in order to expand or take care of standard business needs (inventory, repairs, cash flow, etc.). It’s fast, relatively easy, and if monitored closely, it can be a benefit to a growing business.

Why is a Merchant Cash Advance Important?

The reason why a merchant cash advance is so important to a business is that it allows the company to have access to funds quickly, while at the same time being able to have a higher level of predictability and security than if they were to take out a traditional loan.

The money can be used for a variety of purposes, such as paying off existing debts, or paying for expenses that would otherwise be difficult or impossible to pay off without the help of outside resources. It is important for companies who find themselves in financial distress to get their finances in order before attempting this type of solution.

Because the business owner is able to see how much money they will have coming in each month, it is easy for them to determine if the merchant cash advance option will be a good fit for their company.

A merchant cash advance can also be used by businesses that have received bad credit history and who would otherwise not be able to get approved for the traditional financing process.

Who can use a Merchant Cash Advance?

There are a number of different types of businesses that can use a merchant cash advance. Some examples include:

Start-Up Businesses

A start-up business that is looking to take advantage of the business financing available in the early stages can often find that merchant cash advances are an excellent solution.

Large Corporations

A large corporation that has fallen on hard times can also find that merchant cash advances are an excellent option for them, because they are able to borrow money. 

Small Businesses

If a small business is facing financial difficulties, they may be able to use a merchant cash advance to help get their company’s sales back on track. This is because it allows them to have access to funds quickly, while at the same time being able to have a higher level of predictability and security than if they were to take out a traditional loan.

How Does a Merchant Cash Advance Work?

Merchant cash advances are made available through various online lending platforms. These platforms will typically require the applicant to provide some information about their business, such as how much money they expect to make each month, or daily credit card sales, and the sort of industry they are in. This information is then used to determine what kind of loan is most appropriate for the applicant’s needs. The amount of money that the company is approved for will be based on these numbers. Once approved, the funds will be transferred into a bank account and immediately available for use by the business owner.

The online application process of applying for a merchant cash advance may vary depending on which online lending platform you choose to use. Each platform has its own specific requirements and guidelines, so it is important to do your research before signing up with any lender. It may also be necessary to speak with an attorney who can help guide you through this process so that you do not accidentally commit fraud or get into legal trouble by using a service that requires more than just your credit score and income level in order to qualify for a loan.

Merchant Cash Advance Pros and Cons

Pros

1. Fast Approval: Most businesses that are looking for a merchant cash advance can usually get approved within a few days or even hours. This is because the lender does not need to take time to do due diligence on the business.

2. Quick Repayment Period: Most merchants cash advances are able to be repaid in a matter of weeks, and in some cases, only a few days after receiving their next paycheck. This is because these loans do not require any collateral or security in order to be approved.

3. Easier Financing: In most cases, merchant cash advances are much easier to get approved for than traditional business loan. Because they do not require collateral or security, they are often much more quickly approved than other options that would normally require collateral or a cosigner in order to get approved for a traditional bank loan.

Cons

1. Small Amount: Most merchant cash advances are limited to a certain amount of money that business borrowers can borrow, and this sum is often smaller than what would be available through a traditional loan. This is because merchant cash advances are based on the income that the business expects to make in the future and the percentage of sales.

2. High Interest Rates: The interest rates associated with merchant cash advances are often higher than what you would expect to pay on a traditional loan. Because of this, these loans can be very expensive option for businesses that are already struggling financially.

Is a Merchant Cash Advance Right for Your Business?

The most important thing to remember when considering a merchant cash advance is that it is a short-term solution or short-term loan for your business. In most cases, the business owner will only be able to borrow a small amount of money at a time, and they will only be able to pay back the loan when they receive their next paycheck. If the business owner is not able to pay back the loan on time, they may be forced to make additional payments. If this happens, there may be fees or interest charges that will need to be paid as well. Besides that, it will affect your business balance, future sales, future revenues, and future receivables. 

It is important for businesses who find themselves in financial distress to get their finances in order before attempting this type of solution. Before deciding whether a merchant cash advance is right for your business, you should always try and get as much money as possible from other form of business financing options. You should also consider getting a line of credit from your bank so that you can borrow against your regular monthly income and avoid interest charges on top of what you are paying on your merchant cash advance. However, these short-term loans could affect your business credit history on your business credit profile.