Businesses that are strapped for cash often have little time to find the best or smartest financing solution for their needs. In these situations, or especially situations where a business has already been turned down for funds, a sense of urgency is created where a business owner must apply and qualify for whatever funds can be quickly ascertained, and many businesses, especially those with bad credit will opt for something called a Merchant Cash Advance.
A merchant cash advance, although a solution which works much like a loan, is actually categorized as a business transaction or a sale and/or exchange of a limited amount of a company’s daily, weekly and monthly credit card volume and sales (receivables) in exchange for a lump sum of cash. Where traditional financing companies can and usually do deny a borrower based on credit and other factors, a merchant cash advance provider will take into account very little outside of a business’s daily sales volume and its ability to be direct debited funds over a short period of time, usually nine to twelve months.
While these arrangements are easier to get and often deliver cash in just days after review of typically three past bank statements, they can be difficult for the business owner to pay back and cause an already struggling business, even more difficulty. For instance, a business in need of cash fast may opt to ‘borrow’ $50,000 in exchange to pay back $70,000 over time. This would be the equivalent of a massive 33% finance rate if it were a loan, and in most cases it will need to be paid back within a year.
Payments are usually debited directly from the businesses bank account either daily or weekly and can cause cash-flow problems. Often when small businesses are in a crunch for cash, they will agree to these types of financial transactions only to find out that paying the fees and associated scheduled payments are more difficult than expected and are putting the owners in a worse situation then when they started out needing the original $50,000.
However, there are situations of both 'emergency' and 'opportunity' where these types of financial transactions and arrangements can make sense and/or can benefit a small business. For instance, one is in the case of an emergency, where a sum of money becomes necessary or critical to remain in business, such as a mandatory fine or levy which must be paid in full. Another is a situation of opportunity, where a business can increase its overall long-term sales volume and revenue, if only it had a lump of cash right away such as an acquisition of another competing business.
In conclusion, although these are just some basic advantages and disadvantages of merchant cash advances, these would or could be examples of situations where a cash advance can be useful, but for the most part, they are considered loans of last resort and should be used only with a full understanding of the rates and charges that will come along for the ride in these transactions and will become new liabilities (debts) the business must satisfy to remain successful.
To learn about the process of acquiring a cash advance for your business visit our Frequently Asked Questions page. Ready to apply? Start your application now and get matched with up to $500,000 today!