Home Blog Working Capital Why a merchant cash advance may not be right for your business
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Why a merchant cash advance may not be right for your business

September 23, 2016

If you’ve researched working capital solutions for your small business, chances are you may have heard of a merchant cash advance. This product can be beneficial for small businesses who make a large amount of their sales via credit cards.

Although we are a big fan of this product, and supply them to our customers, it is important to note that they are not right for everyone. In this post, we’ll explain what merchant cash advances are, how they work and which industries will and won’t benefit from them.

Let’s start with a definition

A merchant cash advance is a working capital product. With a merchant cash advance, a funder will provide you with a lump sum, in exchange for a percentage of your business’s future credit card sales. It’s simple; merchant cash advances work with the pace of your business.

Credit cards are key for the merchant cash advance

In order to benefit from a merchant cash advance, you’ll need to accept credit card payments. This matters because a merchant cash advance is the purchase of your future credit card receivables. Without credit card sales, you won’t get approved for a merchant cash advance.

Frequency and size of payments also matter

If you’re wondering if your business should apply for a merchant cash advance, ask yourself how often you get paid via credit card, and how big these sales are. If you only receive a few credit card transactions per month, the result of not making one of those sales could put you in a bind. On the flip side, if you get paid frequently via credit cards, then a few missed payments in a month won’t have a big impact on your business finances. So, if you get paid frequently and in small amounts from credit cards, then you’re ready to fill out a merchant cash advance application!

Therefore, certain industries aren’t the right fit

As we mentioned, without frequent credit card sales, a merchant cash advance wouldn’t be valuable to your small business. Because of this, some industries can’t pursue a merchant cash advance.

For instance, construction companies are paid in big amounts, often at the beginning and end of a job. Since they don’t take credit cards as a payment option, and are paid in big amounts, a merchant cash advance wouldn’t work for them. In comparison, restaurants are consistently paid in smaller deposits, often made from credit card sales. They would be able to handle the remittance of a merchant cash advance. Essentially, determining if a merchant cash advance is right for your business or not should be simple; just ask yourself if your industry accepts credit cards. If yes, then ask yourself how often you receive credit cards, and what is the average transaction size?

Let’s discuss other options

If you answered no to the questions above, don’t fret, just because your business wouldn’t qualify for a merchant cash advance doesn’t mean that there aren’t other viable working capital solutions. For instance, a small business loan can be an alternative for businesses that don’t take credit cards, or are paid in lump sums. By receiving a small business loan, you’ll still receive the funds you need, but there will be a set term and payment amount provided to you by the lender.

Let us know in the comment section below if you think your business should pursue a merchant cash advance.

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