Small businesses always want to have a few plans in their back pockets in case they come in need of fast cash. Another way to get cash quickly is a merchant cash advance. It has similarities to other forms of lending we’ve discussed, but you should always do proper research before signing for a loan.
A merchant cash advance (MCA) is a sum of cash given to you upfront by a lender. In exchange, you will repay them using a percentage of your debit and credit card sales. It is likely that you will also have to pay some sort of fee(s). Cash advances are typically easier to qualify for and are quicker than a traditional bank loan.
Quick cash can sound tempting, so it’s important to do your own due diligence and be positive that this is the route you need to take. But if it is, then a cash advance could be a saving grace for the good of the company. As always, it’s crucial to do your own research when understanding the type of financing your company, but it’s our hope this article will help give you a little more insight in order to make a more educated decision.
How It Works
A merchant cash advance is typically much easier to apply for, which is one of the reasons they can be so attractive. You will agree on a borrowed amount with a lender, and these amounts can be less than, equal to, or more than your monthly sales. However, you need to be careful when deciding how much money you need. Don’t forget that whatever you borrow has to be paid back, so don’t get too overzealous too quickly.
The fee that you will be charged for taking out this loan is often referred to as a factor. Depending on the factor, how much money you borrowed, the current financial status of your company and your financial history, the factor on an MCA could have much higher interest rates.
The final piece to a merchant cash advance is what is known as the holdback. While in the middle of paying back your loan, it is likely you will have a daily amount that must be held from credit card transactions. This is different from other loans, so you will want to make sure that your business can sustain this stipulation.
Conclusion
Ideally you wouldn’t want to use a merchant cash advance if you had some sort of catastrophe or needed a huge loan with reasonable expectations. If you just need a little extra push to be more competitive in the market, then a cash advance might do the trick. But if you’re simply looking for an alternative financing option, then you might want to look into more viable options. There are a handful of good things that can come from an MCA as long as it is utilized as it should be. Loans can be a true lifesaver to any small business.