Understanding Merchant Cash Advance Loans

Unexpected business emergencies can strike without warning, leaving you scrambling to come up with cash. If your business accepts credit cards, merchant cash advance loans could be a potential source of funds to help you cover unexpected costs.

3d text cashWhat Is a Merchant Cash Advance?

A merchant cash advance is an agreement where a company gives you a lump sum of money upfront and secures it by debit and credit sales that you process through your merchant terminal. Every day when you close out your credit card machine, the merchant cash advance company receives a percentage of your sales to pay toward your loan plus the annual percentage rate.

Benefits of Merchant Cash Advance Loans

There are a number of benefits to merchant cash advance loans, including:

  1. Fast access to cash. Merchant cash advance loans are generally approved quickly and usually funds are deposited into your account within a few days of approval.
  1. Relaxed requirements. Because the cash advances are secured by your credit card sales, the requirements for approval are looser, so even if you have bad credit or no established credit history, you may still qualify.
  1. Flexibility. Cash advances do not have a set repayment schedule. You pay back funds as you’re able to based on your credit and debit card sales.

The Cost of Merchant Cash Advance loans

The biggest drawback to a merchant cash advance is its high cost. The annual percentage rate that is assessed on these loans is usually 70 percent to 350 percent more than the rates on traditional business loans. The primary reason for the high cost is the level of risk involved. There is a very high default rate on these loans, so lenders charge a high rate of interest to try and make agreements as profitable as possible while payments continue.

Alternatives to a Merchant Cash Advance

Due to the high cost of merchant cash advance loans, these agreements are best for businesses that have a one-time need for fast access to cash and have a high volume of credit and debit card sales that will allow them to quickly repay the money owed. If you believe that a shortage of cash flow may be an ongoing problem for your business or you do not have high credit and debit card sales volumes, you may want to explore other options outside of merchant cash advance loans. Some other options include:

  1. Fixed Rate Installment Loans. A small business installment loan that you can pay back gradually over a short or long term will have a much lower rate of interest and allow you to make more manageable payments while still gaining access to a lump sum upfront. Good to Excellent Credit is usually Required

 

  1. Revolving Lines of Credit. Business lines of credit allow you to borrow when you need to and then make payments based on a percentage of how much you borrowed. The interest rates on these loans are usually much less than what you’d pay for a merchant cash advance, and money becomes available to use again as you pay it back. Good to Excellent Credit is usually Required for UNSECURED revolving lines of credit. Some banks may have the option of a SECURED revolving line of credit which is secured by some sort of collateral.

 

  1. Business Credit Cards. Many businesses that can’t qualify for installment loans or lines of credit can still obtain business credit cards that may have a lower interest rate than what the merchant cash advance companies charge. Good to Average Credit is required. There are a few bad credit options.

 

  1. Factoring. Factoring is when you used your accounts receivable as collateral for a short-term loan. Factoring is a great option if you need working capital fast. It generally takes 3 days to set you up in the system and 24 hours after that to get you the money. The amount is based on the amount of your receivables and the quality of your clients. Good and Bad Credit Accepted. Approval is based on your client’s credit, not yours.

 

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Elizabeth Roberts

Elizabeth Roberts

Liz Roberts and her team are continuously providing information to people who are ready to repair their credit and improve their credit score. Also NewHorizon.org team strives to empower the homebased and small business owners by bringing information that can help them to manage and grow their businesses. Let our 24+ years of business finance experience help you to get the financing you need! CONTACT US if need financing for your business.

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NewHorizon.org is an independent, advertising supported website. The owner of the site may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website. NewHorizon.org has not reviewed all available credit card offers in the marketplace.

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