Because of the exhausting process of seeking a business loan from a bank, many small business owners go for a merchant cash advance instead.
Applying for a cash advance is easy, and the funds you need get deposited into your account in just a few days. However, advances are often accompanied by hefty charges, which may strain your cash flow.Therefore, if you’re thinking of reaching out to a provider, it’s highly advisable that you first weigh the pros and cons to be certain that a merchant cash advance is for you.
What is a merchant cash advance?
A MCA is a form of funding a business, where a provider lends you a lump sum of money in return for a share of your future credit card sales.
Pros of merchant cash advances
Some of the reasons MCAs are popular among merchants include;
- Relaxed eligibility
Advance providers don’t demand things like good business credit or collateral, which means you’ll have a better chance at acquiring the funds you need.
- Faster application and funding
Cash advances are usually processed faster than traditional loans, giving your quick access to funds. Some companies boast a 3-day turnaround from the time you apply to getting your funds.
- No collateral required
Unlike most small business loan applications, getting a merchant account doesn’t require any form of security.
- High-risk funding
With a high-risk specialist like First American Merchant, you can get a merchant cash advance even when a bank deems your business too young or too risky to fund.
Cons of merchant cash advances
The biggest downside to getting a cash advance is the cost. Although they technically don’t have “interest,” advances come with a fixed rate that determines how much you’ll ultimately need to pay back, and a withholding fee, which is the percentage that a provider will get from your income after every sale. While some providers offer low charges, the average rate is typically 25% – double that of business loan interests. Moreover, because the fees are already set in stone, paying an advance sooner doesn’t mean you get to pay less.
Another major con is that, unlike loans, cash advances are treated as transactions and not expenses, which means your advance won’t be liable for tax deductions.
When to choose a cash advance
Merchants that go for advances are often those that have, for one reason or another, been turned down by banks and other lenders. If you have poor credit, are in a high-risk industry, or in dire need of funding, and you’re willing to accept high overall fees later for access to funds now, then a cash advance may be your best bet.
Regardless, just because cash advances seem more informal than loans, doesn’t mean they should be taken lightly. Do your research and consult a licensed financial advisor/attorney before signing any contract.