A merchant cash advance does not work like a traditional small business loan. In fact, it’s not classified in the financial industry as a loan. A merchant cash advance is a cash advance, which means you must repay the money you borrow in quick installments. This is a fast financing option, but it’s not for everyone. This type of lending is for those who simply do not have the time to qualify for a traditional small business loan, for those who are not able to secure a small business loan, and for those who have bad credit and cannot secure funding in another manner. Here’s everything you need to know about a merchant cash advance before you apply for one.

What is a Merchant Cash Advance?

A merchant cash advance is a form of borrowing that’s unlike a loan. The major differences lie in the amount of time it takes to have cash in hand, what you need to qualify, and the repayment options. To qualify for a cash advance, you don’t need to have nearly the amount of paperwork you need to qualify for a traditional business loan.

– Bank statement
– Credit card processing statements
– Credit score
– Business taxes
– Driver’s license

A merchant cash advance lender will give you the money you need with this information, which is easy to secure without spending too much time going through your files and records. A traditional loan requires you have a great credit score both professionally and personally. It takes time to create a good business credit score, and many people who have a younger business are unable to qualify for a loan simply because they have not been in business long enough.

The other major difference between a cash advance and a loan is the repayment situation. If you secure a traditional loan, you pay a monthly payment for a number of years. This amount and the years in which you make your repayments are set before you get your cash. Your payment never changes, but you do have the option to pay off your loan early for a lot less. If you’re able to make higher monthly payments, you can pay off your loan faster and cheaper.

A cash advance does not work this way. You never know what your payment will be, and you don’t know how long it will take you to make your repayments. Your payment is made daily to your lender based on your daily credit and debit card sales. The agreed upon interest rate is applied to your everyday sales, and that’s how your payment is made. Your payment is rarely ever the same. If you have lower sales one day, you’ll make a lower payment that day. The good news, however, is that a slow week doesn’t mean you cannot afford to make your payments.

The length of time it takes to repay this cash advance varies, too. It could take you three months if you make significant credit card sales each day. It could take you as long as a year to make your repayments in full, and most lenders don’t reward you for making an early repayment. They still require you pay the interest, and the interest rate can reach into the triple digits.

When Should I Consider a Cash Advance?

If you don’t qualify for a small business loan, it’s time to consider a merchant cash advance. If you have a new business, you may not qualify for a loan. If your personal or business credit score is low, you will not qualify for a loan. If a bank doesn’t feel that your business plan is good enough, they may deny you a loan months after you began the application process. This is when you should consider a cash advance.

A cash advance lender is not overly concerned about your credit score, and they’ll consider you for a cash advance even if you have poor credit or no business credit at all. However, you must be aware that the rate you pay will be very high. It can reach as high as the triple digits, which can make the repayment options so expensive your business will not grow. If you cannot secure cash in another manner, this might not be a good idea if you cannot get a rate that’s affordable. It’s a quick way to end up further in debt and in a borrowing cycle you cannot break.

A merchant cash advance can save you when you need funds fast, but it can also be detrimental to your financial situation if you’re not aware of what you’re getting yourself into. This form of borrowing is expensive, but it can be helpful if you know how to approach borrowing.

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