When your business needs cash to take care of daily operations you have a few different choices. Some options are better for B2B operations, while others work for B2C companies. If you’re in retail or another type of business where customers pay by credit card, you could consider getting a merchant cash advance to help you with working capital. In this type of financing, you’ll get a sum of money. You’ll repay the loan from the sales you make in the future. While an advance like this can help with a cash flow problem, but is not for every business. Like any other loan, it comes with costs. Before you decide this type of financing is right for your company, consider some of the pros and cons of a cash advance.
- Easy to qualify: Most businesses are able to meet the standards required by to get a merchant cash advance. A lender will check your financial information and will want to know what your credit card sales have been in the recent past. Be prepared to show that information for the last three to six months. You need not have been in business for long, and your credit history doesn’t have to be blemish free.
- Quick cash: You could have your loan within a week of application. Sometimes you may be able to get your cash in as little as 48 hours. A traditional loan from a bank typically takes months to process.
- No minimum payments: Because the loan is repaid with a portion of your business’s credit card transactions, there is no minimum monthly payment to meet.
- You don’t need collateral: These loans require only proof that you’ve had enough past credit card sales to repay the loan.
- High fees: Fees for a cash advance can run up to 25 percent of credit card sales and annual percentage rates are between 60 and 200 percent.
- Fewer regulations: Borrowers need to beware. Because a merchant cash advance has fewer oversights and rules that bank loans, you could be in trouble if you deal with an unscrupulous lender.
- Lender restrictions on your business: A lender may insist on certain restrictions on your business operations. For instance, they may not allow you to give discounts to customers who pay with cash. You might also be prohibited from taking out other business loans until you repay your cash advance.
A merchant cash advance is a quick way to get working capital, but it is not without risks. Carefully consider the costs and benefits before you decide if this type of financing is right for your business.