The business value of a merchant cash advance (MCA) may be lost on some business owners who otherwise might benefit from the service. Just about any business may find a reason to seek quick cash, yet not all businesses have access to bank loans or credit lines. Many businesses do not have invoices to sell, so factoring is not an option.
Business Merchant Cash Advance:
A business uses a merchant cash advance to gain access to quick cash. Merchant cash advances are cash advances against future credit card receipts. Any business with substantial revenues could use cash advances at any time. The point of an MCA is to get quick access to money.
Loans, credit cards, and factoring serve similar purposes for different types of businesses. But, many small- and medium businesses lack good credit, making a loan expensive or not available. Businesses with no collateral will have trouble getting loans. Credit cards are an option for a small business with a laptop that died.
In a financial emergency a cash advance could be a better option than a loan. A store that’s suffered damage in a storm might get insurance money to cover some of the losses, but not all. Worse, the storm damage might lead to a drastic drop in business.
Sometimes a business may need to get a cash advance to cash in on a huge opportunity. A small retailer may want to stock up on a couple of hot items for the holiday season. A $30,000 cash advance might be the right choice to finance that big additional purchase.
A business using a merchant cash advance does face certain business risks.
Good risk management means not treating future credit card receipts as a source of working capital. Aside from treating cash advances as a back-up or perhaps as a supplemental source of income, business owners need to choose their lenders with some care.
Cash advances can be expensive. A merchant cash advance company will take a substantial premium to cover the cost of advancing their money. The cost of the cash advance can reach an effective interest rate of 20% a year or more. For example, a business may get an advance of $50,000 and agree to pay back $60,000. If it takes 12 months to pay back the $60,000, that $50,000 advance cost $10,000, for an effective interest rate of 20%.
Business owners contemplating a cash advance still need to do some research. Some unregulated lenders might offer to loan money against future credit card receipts, but those lenders are a bit risky. A good lender will also be a lender that has some experience in a particular industry, like resorts or restaurant equipment sales.
Merchant Cash Advances are a Tool:
Like other financial tools, cash advances have certain benefits, huge benefits for businesses with shaky credit. Loans and factoring might be good options for some businesses. Business merchant cash advances fill a need, for businesses that need or want quick access to money.