Merchant cash advance (MCA) resources are available to almost all businesses when circumstances require quick access to money. A merchant cash advance is technically a sale, of some future credit card receipts. Like all financial instruments, there are risks and benefits to using cash advances as a resource.
A Merchant Cash Advance is a Resource:
Businesses have various financial needs and varying resources for meeting those needs. Typical business expenses that can’t be met with revenues can be met with loans, lines of credit or factoring. An advance against future credit card receipts is another potential resource.
Any company with a history of substantial credit and debit card receipts may be eligible for a cash advance, dependent on how much the business owner needs and how much the MCA could realistically expect to collect. A MCA company will sign a contract to take a percentage of credit card receipts until the advance is paid off. The advance may cost 5-10% of each transaction.
Credit cards and business lines of credit might be options for some business owners, but only for very small expenses or for large and stable businesses, respectively.
Factoring, selling the revenue from outstanding invoices, might be an option for businesses that sell expensive services. A durable goods wholesaler might be able to sell future income in this way, but factoring is not an option for many businesses. A small restaurant or a gift shop would not have access to factoring.
A merchant cash advance can be a resource in emergencies. Business owners still need to take account of the potential costs.
Costs and Benefits:
The advances tend to be processed more quickly than regular loans and can be quite large, dependent on the businesses’ proven sales volume. This may be the primary benefit of using a MCA service to get money.
That cash advances don’t need collateral is also an advantage for some firms. Banks generally require that loans be secured by real estate or other tangible assets, which can shut many small businesses out of the loan market.
The good news about cash advances is that payments vary with receipts rather than being a set monthly payment. A short-term business loan of $20,000 might come with an10% interest rate. Borrowing $20,000 for a year might cost a bit less, but loans tend to require either excellent credit or collateral. The repayment terms tend to be inflexible as well. A monthly payment of $1,100 can be a burden if business slows down. A cash advance remains a fixed percentage of receipts, so the monthly cost of the advance goes down, but the total cost of the advance does not change.
Using Cash Advances as a Business Strategy:
Accessing cash and credit is just part of business strategy. Businesses have a variety of options available, dependent on assets and credit rating. Those variables make loans and business lines of credit out of the question for many businesses. A merchant cash advance is a resource to consider using in many circumstances by many businesses.