Merchant Cash Advances: The Pros and Cons of This Funding Option for Small Businesses
As a small business owner, you know the importance of having access to quick funding when you need it. This is where merchant cash advances (MCAs) can be a helpful funding option. But before you apply for a merchant cash advance, it’s important to understand how they work, the pros and cons, and whether it’s the right funding option for your business.
How Merchant Cash Advances Work
A merchant cash advance is a lump sum of money that is given to a business in exchange for a percentage of future credit card sales. This funding option is typically used by businesses that have a high volume of daily credit card transactions. The repayment terms for a merchant cash advance are often based on a factor rate, rather than an interest rate.
To repay the advance, the lender will take a percentage of the business’s daily or weekly credit card sales until the advance is fully repaid. This percentage is known as the “holdback” and is typically between 10% and 20% of the business’s daily credit card sales. This means that on days when the business has higher credit card sales, the holdback will be higher, and on days with lower credit card sales, the holdback will be lower.
Pros and Cons of Merchant Cash Advances
One of the biggest advantages of a merchant cash advance is the speed at which you can get funding. Some lenders can provide funding within 24 hours of approval, which can be a lifesaver for businesses that need money quickly. Additionally, merchant cash advances don’t require collateral, so if you don’t have assets to secure a loan, this can be a good funding option.
However, there are also some drawbacks to consider. One of the biggest downsides is the cost. Because the repayment terms are based on a factor rate, the effective interest rate can be much higher than a traditional loan. This means that you could end up paying significantly more for the advance than you would for a traditional loan.
Another potential drawback is the repayment structure. Because the lender takes a percentage of your daily or weekly credit card sales, your cash flow could be impacted. This can make it difficult to manage your finances, especially if your sales fluctuate from day to day or week to week.
Whether or not a merchant cash advance is right for your business depends on your specific financial situation. If you have bad credit or limited collateral, a merchant cash advance could be a good option. Additionally, if you have a high volume of daily credit card sales, a merchant cash advance could provide the funding you need to keep your business running smoothly.
However, if you have good credit and assets to secure a loan, you may be able to get a lower interest rate with a traditional loan. Additionally, if your cash flow is already tight, a merchant cash advance could make it even more difficult to manage your finances.
Applying for a Merchant Cash Advance
If you’ve decided that a merchant cash advance is the right funding option for your business, the application process is relatively straightforward. Most lenders will require you to provide documentation of your daily debit and credit card sales, as well as your repayment history on any previous loans.
Once you’ve been approved, the lender will provide you with a lump sum of money. From there, the repayment terms will be based on the factor rate and the percentage of future credit card sales that the lender will take as a holdback.
Merchant cash advances can be a helpful funding option for small business owners who need quick access to cash. However, it’s important to understand how they work, the pros and cons, and whether or not they’re the right funding option for your business. If you’re considering a merchant cash advance, be sure to do your