Merchant cash advance or business cash advance is perfect for business owners that have difficulty securing traditional business loans or funding. Businesses that are starting up or do not have regular cash flow cannot guarantee regular payments. Unlike loans, merchant cash advance is not repaid with monthly installments on fixed dates. This helps business owners as the cash advance needs to be repaid only with credit card receipts.
Though loans and merchant cash advances work differently, neither should be taken out without due consideration to certain factors.
Credit card sales vs. Credit score
Business owners with low credit scores face a lot of problems in acquiring traditional loans. Merchant cash advance providers accept the fact that some business owners may not have a good credit score. Therefore, the providers also consider the projected credit card sales of the business.
The amount of cash advanced to business owners depends on both their credit score and credit card sales. Business owners should have at least one of the two — high credit scores or high credit card sales — for a business cash advance to be approved. Approval is almost guaranteed if the business owner has a good credit score as well as high credit card sales.
Terms of the advance
Merchant cash advance providers expect their money to be repaid within the preset payment term. While loans are repaid with interest, cash advance is paid back with a fee that is calculated as a percentage of the credit card sales of the business. Just as the interest rate for long-term loans is higher than short-term loans, the fee charged for merchant cash advance also increases with the term of the advance.
It is advisable to repay the advanced cash as soon as possible, as the overall cost of the advance increases with time. For example, the merchant cash advance that is repaid in six months is cheaper than that paid back in one year.
Selecting the merchant cash advance provider
The same laws that regulate other financing organizations such as banks do not regulate the merchant cash advance industry. Many merchant cash advance providers charge exorbitant fees and exploit the needy or desperate business owners. The industry is trying to regulate itself to ensure its growth and discourage dishonest merchant cash advance providers from hurting the image of the industry.
Before taking out an advance from a merchant cash advance provider, evaluate the terms very carefully and weigh multiple providers to find the best deal. Do not get ripped off by unscrupulous providers. Check references to make sure you are dealing with an honest provider.
Merchant cash advance is an option for business owners unwilling or unable to take out traditional loans. However, there are many disreputable providers in the market, and business owners need to be prudent.
Do your homework as you would before taking out any other loan. Having a clear plan to repay the advance quickly is a good way to reduce the overall cost of the merchant cash advance.