Should my business get a merchant cash advance?

Which Option Is Right for Your Business

So what can you do when you hit an unexpected cash crunch and need funds right away? In most cases, a conventional term loan is a better and less expensive financing option for well-established, creditworthy businesses that are trying to grow their business gradually. The application process can take several days or weeks, however, which is a challenge if your business is in need of fast funding. A merchant cash advance (MCA) can serve as a financial lifeline for urgent capital needs. Instead of working with a traditional bank, a merchant cash advance gives you a lump sum of cash in exchange for a percentage of your credit card sales, which is typically paid back on a daily basis. Need to cover a surprise payroll or rent payment at the last minute? Want funds to purchase new equipment? Bring in a new batch of inventory? Are you gearing up to expand your business? A merchant cash advance can get you the fast funds you need.

Benefits of a Merchant Cash Advance

As noted above, one of the most significant benefits of a merchant cash advance is its speed. Rather than wading through the paperwork and waiting weeks for approval and funding on a conventional term loan, most MCAs are set up through an online application, and cash may be in your account within a few days. Another big advantage of MCAs is that they are easy to get approved for. Traditional business lenders generally want to see strong revenue, an established business that has been operating for a few years, and good credit scores. By contrast, merchants with less-than-perfect credit who need business funding can often find better luck applying with merchant cash advance companies that are less stringent with their application requirements. Because MCA repayment is dependent on your credit card transactions, your repayment amount fluctuates with your sales volume. If sales drop off for any reason, your repayment amount decreases, too. Conversely, the amount you repay increases when sales go up. This can be a huge advantage when you need funds to handle a short-term cash shortfall. On the other hand, because MCA repayment is linked to sales, it can make it impossible or difficult to make a switch or refinance if the need arises. Also, MCA rates are often substantially higher than term loans. Before taking out an MCA, it is important to make sure you’ve asked all the right questions and researched all the potential issues that might affect you. Two of the most critical questions you need to ask are, ”What percentage of my daily credit card sales will you take?” and ”What will I need to repay in total (including fees)?”

On the plus side, if you have a weak credit history or limited credit history, the repayment for an MCA comes from your future sales, which means your credit score is much less important. Because MCAs don’t require collateral, providers can evaluate you based on your current sales volume. If your past credit card sales are strong but your credit score is poor, a merchant cash advance could be a viable funding solution for you.

The biggest drawback to consider with a merchant cash advance is that they represent the most expensive financing product currently available. It’s also worth noting that because the MCA industry is unregulated, MCA lenders may not disclose their rate unless you ask for it upfront. In addition, there may be hidden fees associated with your financing and not all MCA providers are created equal. To make sure you know what you are getting yourself into, be sure to ask your provider about their rate and any associated fees before signing anything. The answer should be clearly spelled out in writing. If it isn’t, walk away. MCA repayment deducts money on a daily basis from your credit card sales until the agreed upon total, including fees, is repaid. This means that your remaining funds may not be sufficient to cover operating expenses. Before agreeing to an MCA, consider what it will be like on a daily basis: your credit card sales come in, but the MCA deduction comes out first, and you have to meet all of your other expenses with what remains. To make sure you’re working with the right provider, it’s important to vet your merchant cash advance providers by doing some online research and checking their standing with the Better Business Bureau. Google the company name and look for what other business owners are saying, or check for complaints on the BBB. The bottom line on merchant cash advances? Because of their cost, explore whether you can qualify for a term loan or other financing before opting for an MCA. If an MCA is still the right choice for you, at least make sure you know the total cost before agreeing to an offer. This is where researching your options can pay off.