A merchant cash advance is where a merchant gets a cash advance from a financing company, and the company gets it back by taking a percentage of the merchant’s daily credit and debit card transactions along with a fee. Technically, it is not a loan, and a merchant cash advance can be a good way for a business to get operational money fast without having to have great credit or put up collateral
A merchant cash advance through a financial company is generally for anywhere between $2,500 and $250,000, and it is repaid on a daily basis through a special account that is set up. Funding can be approved in as few as two days.
Benefits of merchant cash advances include quick access to money and a simple approval process; pretty much any type of business can qualify, and bad credit isn’t a deal breaker. On the potentially negative side, merchant cash advances generally have a higher fee than traditional loans, and the daily payments decrease cash flow.
When evaluating a business that has applied for a merchant cash advance, the financial company will look at the credit card transaction records of the business because that is where the money to pay back the advance is going to come from. Some financial companies will look at the applicant’s credit bank rating and credit score, but these factors are less important.
Applications are usually completed online, and this is one reason why they are processed so quickly. Applicants generally need to provide their credit card processing statements, tax returns and identification documents such as drivers licenses and other identification documents.
Amount of time for repayment
It generally takes eight to nine months for a business to pay back a merchant cash advance. However, this depends, and sometimes it can take as few as four and as many as 18 months for a merchant to complete the payments through their credit card transactions. While traditional loans are generally paid back at a certain interest rate, a merchant cash advance is paid back at a factor rate. Merchant cash advances generally go to riskier types of applicants, and that is another reason why they are expensive.
A business debt schedule allows the business applying for a merchant cash advance to keep track of repayments. Often, a financial company will request that one be prepared before approving an advance. A business debt schedule template is a convenient digital way to manage the process.
When is a merchant cash advance a good idea?
While many business owners are attracted to merchant cash loans by their convenience and the speed of the approval process, they are taken aback by how much the payments eat into their daily cash intake. Having said that, because payments are tied into how much money the business takes in through credit card transactions, less money is repaid during slow periods for the business, and this is unlike regular traditional loans where set amounts are due on a schedule in order to avoid late fees.
Another enormous attraction of a merchant cash advance is that the business getting one does not have to put up collateral. Furthermore, it’s almost always easier for a given business to be approved for a merchant cash advance than a traditional loan. Of course, convenience comes at a price, and a merchant cash advance is almost always more expensive than a traditional loan.
In short, a merchant cash advance can be the right solution if the business getting one makes good money consistently through credit card transactions. Because of their expense, it’s always a good idea to explore other options before applying for a merchant cash advance.