The Pros and Cons of Getting a Merchant Cash Advance

When you’re in charge of a business, there are inevitably going to be moments where you need access to more funds than you actually may have on hand.

While term loans can be great options with long repayment periods and low interest rates, they sometimes take several days if not weeks before an application is approved. So whatever your business needs money for? It could be too late by the time you are funded.

If you’re planning big business changes to make over time, have a solid footing in business and a healthy credit score, a term loan is most likely your best option when it comes to business funding. But if you need quick access to working capital, have a below average credit score, or even bad credit, you may want to consider a merchant cash advance.

Simply put, a merchant cash advance is a lump sum of money the borrower receives with a fast turnaround. Then he/she repays the advance through a percentage of your credit card sales or in most cases these days pays it back by direct debit out of a business checking account with daily or weekly automatic debits.

Merchant cash advances make the most sense as a financing option for short-notice situations, such as making payroll or rent. However, they can be used for any business purpose like financing a piece of equipment, purchasing inventory, or expanding your business.

A merchant cash advance is a great option if you’re temporarily short on funds and need to cover a cost quickly. Unlike many traditional bank loans that may take days, weeks or months to process, most merchant cash advances involve an online application; you could potentially see the advance hit your business account within a day or two.

If you repay your merchant cash advance based on your daily credit card sales, you’ll end up paying less when sales are down and more when they are up. This can be a good thing, because unlike other loans with a set repayment schedule, you won’t owe more than you’ve earned in a certain period of time.

However, it can be easy to get roped into an undesirable borrowing situation if you need cash quickly. And unlike other types of funding, refinancing a merchant cash advance paid back by your credit card receivables can be tricky (if not impossible), since your repayment is tied up entirely in your future credit card sales.

Another difference between a merchant cash advance and traditional bank loan is that there is a wider range of accepted applicants. Traditional lenders typically only approve business owners for funding when they have good revenue, several years in business, and a good credit score.

For struggling business owners, this presents a problem. They say you need to spend money to make money, but if you can’t get approved for a traditional loan, how are you supposed to make that happen?

Merchant cash advances are a viable option for business owners who don’t have good credit scores, or who haven’t had enough time in business to build a solid history of creditworthiness and profitability. Since merchant cash advances are paid back by automatic daily or weekly debits, credit score is not nearly as important a factor as it is for other types of loans.

Of course, there are caveats that come with granting funding to a wider pool of business owners. One of these is the higher cost of money that comes with a merchant cash advance.

Approval is very quick with most MCA lenders and unlike other types of funding, you won’t have to put up collateral against the amount you borrow. This is because merchant cash advance providers look to your past revenue or current sales to get an idea of whether you’ll be able to pay back the lump sum, and not necessarily your credit history.

When it comes to repayment, an amount will be deducted from your daily credit card sales or debited directly from your business bank account until you have paid back your agreed-upon sum (plus fees).

However, this inevitably reduces your cash flow on a day-to-day basis. Before you agree to accept a merchant cash advance, be sure that your business will be able to handle this disruption. Will you still be able to cover all your other expenses? If not, perhaps it’s time to explore your other options.

One last note: as we mentioned, merchant cash advances are not a regulated industry. This means that some lenders will have good experience and solid client testimonials, and others won’t. To make sure you’re getting in the best possible situation for your business, be sure to research these various companies online, including checking into their profiles on the Better Business Bureau.

Being in control of a business is hard, and finding the right financing can be quite a chore. The fact that you’re researching your options in the first place is a good start. We need to say it one more time: MCAs are expensive. So you may want to see if you qualify for something else first (if you have time to do so).