Pros and Cons of a
Merchant Cash Advance

Are you a small business owner looking for immediate capital to satisfy your business needs? You came just to the right place, as this article will be discussing a merchant (i.e. business) cash advance – its benefits and shortcomings.

What is a Merchant Cash Advance?

A merchant cash advance allows business owners to obtain upfront capital in exchange for a percentage of future credit card sales. To qualify for a merchant cash advance, a business owner must:

  1. have no prior bankruptcy on file
  2. actively run the business for less than one year
  3. have the ability to process credit card payments for his/her customers

Benefits of a Merchant Cash Advance

Traditionally, banks are very reluctant to give loans to businesses with poor or bad credit as they are considered to be “too risky” for lending capital. This further results in long approval time and even longer list of collateral. That having been said, let’s take a look at the list of benefits that differs a merchant cash advance from traditional lenders:

  1. Quick Funding

    For business owners who need immediate cash to complete the payroll for their employees, add new inventory, or simply operate their business, banks may not sound like the go-to option. Merchant cash advance, on the other hand, can come in handy when you are looking to get the cash you need when you need it. Something as simple as this can mean the difference between the success or failure of a business.

  2. Repayment Flexibility

    Nothing can be as draining for your business as fixed monthly repayments. As unpredictable as life is, you never know whether your business will slow down or pick up any given month. As such, you should consider a merchant cash advance as repayments are solely based on a percentage of sales. That way, if sales are slow at first, your monthly repayment amount will be adjusted accordingly.

  3. Bad Credit is Never a Problem

    Unlike large corporations who has excessive funds at their disposal, a small business owner like you may struggle to get the capital to sustain the business needs due to a poor credit. Good news! Merchant cash advance does not require a perfect credit score to get the immediate funding for your business, which is exactly why it involves high approval rates. The reason behind this is that merchant cash advance companies offer a lump sum of money in exchange for future sales, which makes the approval easy even with no perfect credit rating.

  4. Little to No Paperwork Required

    Unlike traditional lenders, a merchant cash advance application is done online and does not require any extensive scanning, faxing, filling out long forms or any other action that would further slow down the process. This helps significantly reduce wait time and increase turnaround time.

  5. No Collateral Required

    Traditional lenders usually require extensive collateral from business owners to give it upfront before obtaining the funds. This is not the case with a merchant cash advance! There is no collateral required and the approval of the transaction is based on the businesses past credit card sales!

Shortcomings of a Merchant Cash Advance

Even though a merchant cash advance is a great solution for business owners to obtain funds they need when they need it, there are a few things to keep in mind:

  1. High Rates

    During urgent financial needs, business owners do not have enough time to crunch all of the numbers. However, it is important to understand how merchant cash advance rates work to avoid any unexpected fees. Instead of having an interest rate, a merchant cash advance comes with a fee that is measured by a factor rate. A factor rate usually ranges between 1.14 and 1.48, and it signifies what you multiply your loan amount by to find the total amount you will owe in the future. As these fees can be well above the interest rates for loans, make sure you understand exactly how the factor rate is calculated before taking a merchant cash advance.

  2. Limited Cash Flow

    Believe it or not, the most common problem business owners have with merchant cash advances isn't the rates, but the payments. By withdrawing cash through a merchant cash advance, a business owner begins accruing charges the very next business day after receiving the funds. While you are able to pay back less money on slower days, the charges can still put a major crimp in your company's cash flows.

  3. No Fixed Advance

    Lending industry issues a merchant cash advance based on future credit card sales rather than fixed monthly repayment amount. It is crucial for every business owner to do the homework on lending companies before taking out an advance to avoid being caught up in an unregulated setting and, hence, unexpected payment obligations.

An Alternative

If you feel like a merchant cash advance is not a good idea for your business, here’s an idea: a small business loan! Prestigious lending companies, such as ZapRates, have a skilled team that combines old experiences and relationships with cutting-edge technology to make business funding a fast, easy, and enjoyable process. This is important to know when looking for alternative ways to find quick and efficient funding solutions for your business.