A merchant cash advance is a type of financing that provides small businesses with a lump sum payment in exchange for a percentage of future credit or debit card sales. Here’s everything you need to know about merchant cash advances:
How it works: When a business applies for a merchant cash advance, the lender evaluates the business’s revenue and credit card sales. Based on this information, the lender offers the business a lump sum payment, which the business repays through a percentage of their daily credit or debit card sales.
Payment structure: The payment structure for a merchant cash advance is different from traditional loans. Instead of making fixed monthly payments, businesses make daily or weekly payments based on a percentage of their credit or debit card sales until the advance is repaid in full.
Approval process: Merchant cash advances are often easier to obtain than traditional loans since they do not require collateral or a high credit score. Lenders focus on the business’s revenue and credit card sales when evaluating the application.
Interest rates: Merchant cash advances are considered high-risk loans, so they typically have higher interest rates than traditional loans. The interest rate is often expressed as a factor rate, which is a decimal that is multiplied by the amount borrowed to determine the total cost of the advance.
Benefits: Merchant cash advances offer several benefits, including quick access to funding, flexible payment structures, and no collateral requirements. They are also an option for businesses with poor credit scores or limited collateral.
Drawbacks: Merchant cash advances can be expensive due to the high interest rates and fees. The repayment structure can also be a burden on businesses that experience slow sales periods. Additionally, businesses may end up paying back more than the amount they borrowed due to the factor rate.
Alternatives: Businesses that do not qualify for traditional loans or do not want to take on high-interest debt may consider alternative financing options, such as crowdfunding, invoice financing, or peer-to-peer lending.
Overall, a merchant cash advance can be a viable financing option for small businesses that need quick access to funding and do not qualify for traditional loans. However, businesses should carefully consider the costs and repayment structure before committing to an advance.