Is a merchant cash advance the right financing option for your business?

Owning a business comes with several challenges, and one of them is managing the cash flow. It’s normal to have dips in sales or not be liquid because of late customer payments. Another situation you may face is an opportunity to expand but not having the funds to do so.

In these scenarios, it helps to borrow money to keep the business afloat or expand. However, not all companies may qualify for a traditional business loan from a bank. Banks typically want to see that the business is financially sound and has been running for years before offering a business loan.

You might consider applying for a merchant cash advance if you’re a small business owner and require a cash injection. Every business is unique, so whether or not a merchant cash advance is a right option for you depends on your business circumstances.

What is a merchant cash advance?

A merchant cash advance (MCA) is considered a cash advance rather than a loan and is typically not regulated. These are often useful for small businesses that don’t qualify for a traditional loan.

To apply for an MCA, the lender may evaluate your credit and debit card receipts as the amount you’re eligible for is based on the volume of these receipts. The application process is typically quicker than that of a business loan.

Repaying a merchant cash advance

Unlike a traditional loan with an interest rate, a merchant cash advance has a factor rate and may charge additional admin and underwriting fees. The factor rate can range from 1.1 to 1.5 and is determined by several things that, include:

• Debit and credit card transactions
• The number of years the company has been operational
• The industry the business operates in
• The company’s financial situation
• Owner’s credit score

If your company’s financial situation is poor and it seems that you may struggle to repay it, acquiring an MCA is risky and, therefore, will carry a higher factor rate.

There are two ways to repay the merchant cash advance.

The lender will deduct a portion of your sales

If this is how your MCA repayment plan is structured, you can think of the lender purchasing a portion of your future sales. Depending on your contract, the lender will automatically deduct a part of your sales weekly or daily until the total amount, including fees and the factor, is paid.

Since this method is based on sales, the amount you repay is not fixed, and there isn’t a set term either. Typically, the repayment period can range from one to eighteen months, but if your sales are high, you can repay the amount you owe quickly.

Fixed monthly payments

Another repayment option is similar to that of an installment loan. If you choose this method, you will repay the merchant cash advance in fixed monthly or weekly installments until the total amount you owe is repaid, regardless of your sales. Your fixed monthly installment is typically calculated based on your estimated monthly revenue.

This repayment method allows you to plan as you know how much you will be paying monthly, and you will have a precise repayment period.

Advantages and disadvantages

Before deciding if an MCA is the right financing option for your business, it’s helpful to know the advantages and disadvantages of this financing solution.

Advantages

• A significant advantage of a merchant cash advance is that it allows you to get the money quickly. Often, applying for a business loan from a bank is a lengthy process, so if you need cash fast, an MCA is an option.
• You don’t need to provide collateral, so you don’t risk any of your assets.
• While the lender may look at your credit score, having a low credit score won’t diminish your chances of securing an MCA. Business owners who have poor credit in their personal capacities are typically granted merchant cash advances.
• The repayment terms are usually flexible. That’s particularly true if your repayment structure is based on your sales. When your sales are low, the amount can be adjusted.

Disadvantages

• MCAs are usually more expensive than business loans. Apart from the factor which can be high, you may also need to pay fees.
• Since the amount you owe is deducted either daily or weekly from your sales, it may impact your cash flow, leading to a debt cycle.
• Even though you repay the amount you borrowed, it will not improve your credit score, as an MCA isn’t considered a loan.

Alternate financing options

While a merchant cash advance is one way to solve cash flow problems in your business, there are other options for companies that don’t qualify for traditional business loans from banks.

Even with a low credit score, other lenders may offer personal loans specifically designed for people with bad credit. You can apply for a loan from companies like CreditNinja low credit lender, and use the money for your business.

When looking for bad credit loans for your business, you must do your research, as there is a wide range of options available with varying terms.

Conclusion

A merchant cash advance may work for your business if you need money quickly. This financing option has flexible repayment terms, usually based on your sales, but you can choose to repay it in fixed monthly installments. An alternative is to apply for a bad credit loan; these loan types are designed for people with poor credit, and you can use them to fund your business needs.

References

• Businessnewsdaily: Should You Consider a Merchant Cash Advance?
• Nerdwallet: Is a Merchant Cash Advance Right for Your Business?
• Forbes: Is A Merchant Cash Advance Right For Your Business?
• Nav: Merchant Cash Advance

 

25/10/2022