when a merchant cash advance makes sense
About Merchant Cash Advance
Originally, the merchant cash advance was designed to be a lump-sum payment to a business in exchange for a percentage that is agreed upon on future credit or debit sales. Currently, this is a system that entails small business financing whereby funds are passed on to businesses independent of loans, in exchange for a percentage of the businesses’ daily credit income.
Merchant cash advance is otherwise known as factoring, and it is among the newest and greatest alternatives to the system of traditional bank loans. For over ten years MCA (Merchant Cash Advance) has provided business owners with the opportunity of getting advance loans to keep on financing their businesses. Suffice it is to say that every business owner dreams and tries their best to keep their business running smoothly while providing satisfactory returns, but this is not always the case.
Along the way, business owners are faced with certain quandaries here and there, and the option has always been bank loans, but with the emergence of the merchant cash advance, the previous should be long forgotten. This is because the MCA provides one with an easier and less stressful method of getting loans compared to the bank loan process that is characterized by lengthy negotiations that often are stressful and lack any guarantee of even getting the loan at the end of the tedious process.
What MCA entails and how to go about it
The merchant cash advance provider gives you an upfront sum of cash in exchange for a part of future sales. The repayments can be done in two ways:
One can get an upfront sum of money in exchange for a part of your future credit/debit card sales.
One can get upfront cash that is repaid by giving fixed daily or weekly debits from your bank account, and this is a method known as Automated Clearing House (ACH).
The latter has become the most common mode of repayment.
Advantages of Merchant Cash Advance
• They are quick. One can get the merchant cash advance within a week or so, and there is no heavy paperwork.
• One does not risk losing any personal belongings such as their house. The MCAs are unsecured, and as a result, one does not require any collateral. This simply means that there’s no need to forfeit any personal or business assets if things do not go as expected.
• When sales are down, one’s payment may be down too. A fixed percentage of one’s sales sets a basis for the repayment, and therefore the repayments adjust based on how well one’s business is doing. This is a very fundamental advantage since it seems to put into consideration the fact that businesses do not always run smoothly or rather, one is bound to incur losses once in a while hence payment is made vis-à-vis considering how well one’s business is doing.
Traditional bank loans
Banks are generally the largest business lenders, and often the first place business owners think of seeking financial aid when their businesses are facing financial constraints. It is true that banks offer some of the lowest cost loans, but only if one qualifies.
Furthermore, small business owners also very rarely do qualify for bank loans with statistics suggesting that around 72% of small business owners actually get rejected and fail to qualify for bank loans.
Applying for these loans is tedious as aforementioned and usually lasts for about one to three months. Yes, it is true that some upsides come along with using traditional bank loaning system, but for the purposes of this comparison, we shall mainly focus on the cons with a view of clearly illustrating why Merchant cash advance is preferable.
1. The traditional loan banking system entails very lengthy paperwork and this in itself is a very mortifying factor.
2. Processing these loans is time-consuming: one to three months as mentioned above, and this is so disadvantageous since the party applying may have other things to do.
3. Larger loans usually have certain terms and conditions that one must adhere to such as the provision of quarterly management information.
4. The loans are not very flexible since one may end up in a situation where they are paying interest on funds that they are not using, and this clearly is a huge downside.
5. Bank loans require collateral which is usually secured, and if secured against your business assets or personal possessions like one’s home then one risks losing either if they cannot make repayment and this is a major quandary. When one requires financial assistance they expect or rather hope to get this from someone who they are certain is open minded and cognisant of the fact that financial setbacks are not foreseeable and this is manifested by the lending party not being ready even to consider taking away fundamental possessions.
In conclusion, when one compares the two phenomena; merchant cash advance and traditional bank loans, it is clear that the former is more preferable and reliable and therefore the best way to go