The tight lending market has spurred demand for alternative sources of financing for small businesses. One potential source of funds is the merchant cash advance.
How Merchant Cash Advances Work
Small businesses looking for quick access to capital can use merchant cash advance services. Cash advance providers offer businesses upfront and lump sums of money in exchange for a share of future credit card sales. It is a convenient and fast way to get the working capital funds a small business needs.
Note though that a merchant cash advance is not a loan. Rather, it is a purchase and sale of future credit card sales. It is typically paid in less than 18 months; often requiring minimal paper work and flexible terms.
Once you’ve signed a service agreement, you will be set up to repay your advanced amount through automatic transfers from your merchant account. The transfer will be a set percentage of your daily sales, including service fees. You will start paying the money back immediately so make sure that your current sales volume can handle this.
What to Watch Out For
The average providers charges about 30% or more on the money they advance. By comparison, the interest on a loan or credit line can range from 60% to 200%. Just because it is being paid for by money that you will make in the future doesn’t mean that you aren’t still losing money. Some companies may be willing to pay these prices because they have limited options, but you should treat your cash advance like what it is, a loan that eventually needs to be repaid.
Read the fine print of the contract because some merchant cash providers will sneak in stipulations that could cost you money down the road. Some will have fees that kick in when your sales volume drops, some will require full repayment after a certain period of time, and some will extend or balloon their repayment periods. Make sure you approve of everything and don’t sign a deal that will end up costing you extra money.
If you default on your payment there will be provisions in your service agreement that will require you to pay late fees. Read this part of the agreement carefully and know the full penalties of missing a payment. Also be careful what information you give out, because some companies will place levies on your personal bank accounts or directly withdrawal money from them.
Typically providers like to deal with retail and service companies and restaurants because these businesses make a lot of their profits through credit card purchases. Also these businesses often don’t qualify for loans because they have bad credit or little or no collateral.
In order to qualify for a merchant cash advance your company will have to meet certain requirements. Most providers will want you to have been in business and accepting credit cards for a certain amount of time. They will also want to know how long you have maintained sales volume. You will need to have an established financial history in order to get the best rates from vendors.
Typically the approval process is fast and painless, but make sure that you do not rush through it. Do not accept the advance terms or amount right away. Many providers will let anybody take an advance because they make so much off of default fees and penalties from businesses that they knew would not be able to pay off their advance. Make sure that the deal you accept is one that you can afford.
Recommended Books on Merchant Cash Advance:
- Merchant Cash Advance: How To Finance A Business By Leveraging Credit Card Receipts
- Mastermind: Merchant Cash Advance Marketing Vol. 1
- No Cash? No Problem!: Learn How To Get Everything You Want in Business and Life, Without Using Cash
- Cash Flow 3.0: Advances in Cash Flow Lending based on Sustainable Cycles
- Payday Loans and Cash Advance: Pros and Cons – Mistakes and Traps to Avoid