Applying for a Merchant Cash Advance? Know the Advantages and Disadvantages

There are several options for small business owners to resort to when funds are needed. Lines of credit, credit cards, short term business loans, bridge loans, even direct lenders and hard money loans are some of the most common.

However, when these options are not available or you’re over extended, merchant cash advances are an alternative. Also known as a business cash advance, merchant cash advances are pretty much an immediate source of funds, yet they differ greatly from a traditional loan.

In simple terms, merchant cash advances provide a small business owner with the necessary funds quickly. Then, paying back the loan to the lender is via a percentage of future sales from daily credit card transactions with an added fee.

Sound good? Well, there are a few hitches. So, here are just a few of the advantages and disadvantages small business owners need to know before they resort to a Merchant Cash Advance.

1. Easy Qualification

According to Fundera.com, merchant cash advances offer low eligibility standards, so it’s easier for small business with no low credit scores (or little collateral) to qualify for one. Basically, merchant cash advance providers review processing statements to verify business volume. Some may also request credit scores and bank statements. Plus, some can be applied for online and be approved the same day.

2. A Convenient and Short-Term Financial Tool

Another benefit of merchant cash advances is they are convenient for small business in the retail or restaurant sector since sales are commonly through credit card transactions. Fundera.com states that a merchant cash advance is also unsecured, which means a large amount of collateral (such your house) is not required. So, a small business can get the funds quick and use it inventory, bill payments, or other necessary payments.

3. Do the Math

With all this convenience of a merchant cash advance comes a price. A steep one. In fact, it’s commonly known that a merchant cash advance is one of the most expensive types of loans available. Fundera.com explains that merchant cash advance providers measure fees by a factor rate (rather than an interest rate) and range from 1.14 to 1.48. The factor rate is then multiplied by the amount you borrowed to determine how much you owe. In even more simple terms, Fundera.com says the annual percentage can often start as high as 15 percent. One of the other reasons merchant cash advances can be so expensive is businesses with bad credit ratings (or newer businesses) are riskier, which results in higher rates and fees.

Understanding everything involved in a merchant cash advance is important before applying for one. If other revenue streams have been exhausted or more credit is not available, it’s always best to read the fine print. Perhaps speak with your financial advisor or private lender for more information to avoid further costs to your business down the road.