As you explore various business funding options, chances are you have (or soon will) come across something called a merchant cash advance. Below is a basic overview of this increasingly popular alternative to conventional bank loans and 401(k) loans; especially for startups and small businesses.
What is a Merchant Cash Advance?
A merchant cash advance is a type of business funding that is suitable if you conduct most of the transactions by credit card (e.g. retail, restaurants, car repair, etc.). The loan amount can be anywhere from under $10,000 to over $100,000, and the term duration ranges as well from a few months to over a year. Generally, it’s a good idea to obtain a smaller amount than you anticipate, and then re-apply for additional funding later if your forecast turns out to be correct.
How do they work?
Now that we know what they are, you may be asking how do merchant cash advances work? With a conventional bank loan, a prescribed amount is paid back on a scheduled basis (usually monthly, but sometimes bi-monthly or weekly). However, a merchant cash advance handles repayment quite differently. Instead of a fixed amount, you’ll pay back a small percentage of your daily credit card sales.
For example, if the repayment amount is 2% and on a particular day you generate $400 in credit card sales, you would pay back $8. Or more specifically, $8 would automatically be transferred from your bank account to the lender. This is an important aspect because it’s one less administrative task for you to do (or as is often the case, forget to do since you’re so busy trying to get other things done!).
Aside from being easy to administer, merchant cash advances are unique in that (as noted in the example above) the repayment amount is dynamic and adjusts based on actual daily sales. As such, when sales are high and cash flow is ample, a bit more is paid towards your loan — and the needle moves closer to full repayment. Alternatively, when sales are slow and sluggish, a bit less is paid towards the loan – which means there’s more cash-on-hand for you to pay bills, and allocate towards revenue-generating activities and projects such as advertising, running promotions, extending business hours, and so on.
No Collateral or Long Credit History
In addition, merchant cash advances typically don’t need to be secured with collateral, and you don’t need a long, virtually flawless credit history. Many lenders only need to see a few months of operational history. As long as they think your business has a future and are confident in your leadership abilities, there’s a very good chance that your application will be approved. Even a past bankruptcy typically isn’t a deal-breaker, provided that it’s discharged at the time of application.
Is a Merchant Cash Advance Right for You?
Naturally, it’s beyond the scope of this (or any other) article to confirm or conclude that a merchant cash advance is the right business funding option for you. However, if you do conduct most of your transactions through credit card, then it could indeed be a favorable option that helps your business survive, and thrive.