A cash advance for merchants might be a viable financing option for a wide range of businesses. Many vendors offer loans against credit and debit card receipts under different terms, in addition to offering quick access to money. Unlike conventional financial instruments, cash advances depend on future receipts instead of credit ratings or collateral.
Best Use of Cash Advances by Merchants:
A cash advance can be expensive, so this needs to be considered in deciding whether to use a cash advance or another form of financing. An advance of $20,000 can cost $25,000.
This is a high borrowing cost, but in a financial emergency there might be no other options. A gift shop that takes damage in a storm and then suffers from a plunge in tourist numbers might not be able to survive until business returns to normal. This is the sort of scenario where a small business would benefit from using a cash advance.
Cash advances should not be used to fund regular business expenses, like a seasonal advertising blitz or purchases of hot new products. The premiums charged on cash advances make it difficult to make a profit.
Factoring, lines of credit and short-term loans also have their place in business finance, but with additional costs and risks. Many small- and medium-size businesses have limited access to credit and little or no collateral to use in securing loans.
A cash advance merchant can process an application, get the money and transfer the money in seven or eight days. A short-term loan is going to take longer, but cost less than a cash advance.
A cash advance merchant can be a good option for those businesses. Other options, like loans and credit lines are not always viable options, because companies often lack collateral or credit, or the outstanding invoices to sell to a factoring vendor.
Costs and Benefits:
A merchant might take 10-20% of each transaction until the total advance and premium has been paid off. The monthly payment then depends on actual receipts, whereas a bank loan would come with a fixed monthly payment.
The difference between that fixed payment and the lower cash advance payment can be hugely important if business slows down. A business paying off a loan has to come up with that $2,000 payment even if this places a serious burden. The MCA vendor’s receipts would simply go down while the customer’s business is slow.
Review potential lenders, as a risk management strategy. The costs and terms will vary by merchant, so some comparison shopping can save a little money. Business owners will want to look for three things in a lender:
- Licensed in the state
- Experienced dealing with the relevant industry
- An established reputation and track record
A reputable and experienced lender should not be difficult to find.
Consider Merchant Advances as Options:
Businesses of all sizes have finance options, all of which have their place. A cash advance merchant offers an optional source of short-term or emergency funding that many small- and medium-businesses can consider.