A merchant cash advance might be an option for you if you’re a small business owner in need of capital right away. It’s not a loan, but it’s the capital you need to make improvements, buy new appliances, or pay for expansion when the time is right. Unlike a traditional small business loan, this is a form of borrowing that allows you the chance to take out money to use for your business right away rather than weeks or months down the road. It’s a faster form of borrowing, but it does come with a long list of pros and cons. If you’re not sure if a merchant cash advance is right for you, now is the time to learn what you can about this type of lending prior to taking any action.
What is a Merchant Cash Advance?
A merchant cash advance is a way for you to borrow money for your business without taking out a loan. It’s fast and easier than a traditional small business loan. Essentially, a lender takes your information and application, they go over it, approve it, and fund your request in a matter of days. The amount of paperwork required for this type of borrowing is significantly smaller than the amount of paperwork you need for a loan, and your chances of being approved are much higher.
The merchant cash advance lender than takes your repayment via your credit and debit card sales. You won’t make a monthly payment on the loan. Instead, you’ll provide the lender with a daily percentage of every credit and debit card sale your business makes. The repayment period is short, too. It’s not years like a small business loan. It takes approximately one year to repay a merchant cash advance, but you never know how much time it will take. It’s all based on the amount of credit and debit card sales you make throughout the month. You could off this loan in a much shorter amount of time if your card sales are significant, but it might take you longer based on a slow year.
Sales fluctuate regularly, so it is impossible to know whether you’ll need a full 12 months to repay this loan. Some businesses can do it in a matter of three months. Others need the full year. Most average full repayment approximately seven to nine months after they take out a merchant cash advance.
Do I Need a merchant cash advance?
This is a question you must ask yourself when you want to borrow money to make your business grow. Many business owners turn to this type of unconventional lending when they find themselves in specific situations. For example, you might turn to merchant cash advance if you don’t qualify for a traditional small business loan. This might happen if you have a newer business without much work history. It might happen if you don’t have a business credit score or a good personal credit score.
The other main reason people turn to a merchant cash advance in lieu of a traditional small business loan is that it funds so much faster. A small business loan is issued through a financial institution, which is required to meet strict lending requirements. You could spend weeks or even months providing paperwork, jumping through hoops, and hoping for approval only to find out you’ve been denied a loan. A merchant cash advance is funded quickly. Most are funded in just a few days.
Another reason you might choose a merchant cash advance is that you don’t want to provide collateral. If you are worried about losing your home to repay a loan, you might prefer a merchant cash advance as it doesn’t require any type of collateral. Finally, you might want to go for this option because you can lower your payment when your sales are down. A traditional loan requires you to make a specific payment each month. A merchant cash advance repayment is made daily, but the amount fluctuates based on the amount of your sales that day. If sales are down, your payment is also down.
The Downside of Merchant Cash Advances
Before you sign on the dotted line, be aware that the repayment of a merchant cash advance might be expensive. The interest you pay might be as high as triple digits if your credit score is low. Another downfall is that early repayment doesn’t always benefit you if it’s not in the contract that you can repay the loan and not pay the total amount of interest on the loan. Furthermore, many people who take out a merchant cash advance do so without realizing just how expensive their repayment is, and that can lead to more debt, additional advances, and more money owed. It’s a vicious cycle if you are not careful with your money.
If you’re in need of a loan for your business to grow, you must have a stellar business plan that you know will result in higher sales and a bigger profit. It’s the only way to make sure your merchant cash advance doesn’t target your income and profit too much. If you can afford it and you cannot wait to get funding from a traditional lender, this kind of merchant cash advance might be right for you.