Pros and Cons of a Merchant Cash Advance
In this post, we’ll explain what a merchant cash advance is and highlight the pros and cons associated with receiving this financing product.
Merchant Cash Advances Explained
Many people believe that merchant cash advances are a type of business loan, although this is not the case. Instead, it is important to note that a merchant cash advance is the purchase of your business’s future credit card receivables. Your lender would provide you with a lump sum, and then a percentage of your business’s future credit card receivables would be put towards fulfilling your obligation.
Pros of a Merchant Cash Advance
While merchant cash advances are not for everyone, they can be useful to some business owners. Here are the top benefits to consider:
- Remittance based on your business’s sales: One of the top advantages to receiving a merchant cash advance is the remittance structure. With a traditional term loan, a business is required to make their set payment, whether their customers have paid their invoices or not. This can put a strain on a business that may have slow paying clients, or those with fluctuating cash flow. As we mentioned, with a merchant cash advance, a percentage of your business’s credit card sales is used to meet your obligation. So, if you have a slow sales month, you won’t be paying as much as you would during busy seasons.
- Payments are automatically made: When remitting a merchant cash advance, payments are automatically withdrawn from your business’s received credit transactions. This means that you don’t have to take time out of your schedule to make the payments, and there is very little chance of late fees.
- Funds are received quickly: When applying for a business loan from a bank, it could take weeks or months to finalize the process. If your business has an immediate financing need, you probably cannot risk going through a long financing process, only to find out that you did not qualify for a business loan. With a merchant cash advance, funds can often be available for a business to spend in less than a week, with many lenders able to finalize the deal in less than 72 hours.
- No additional collateral required: Even if your business has assets, you may not be in a position or have a desire to pledge these as collateral for a business loan. With a merchant cash advance, the only collateral that lenders generally require is the percentage of your business’s future sales receipts, which keeps all other business assets available for other uses as needed.
Cons of a Merchant Cash Advance
Access to fast cash without set terms sound fabulous, but there are some downsides to receiving a merchant cash advance that you should be aware of before applying:
- Interest rates can be high: One of the biggest reasons that businesses shy away from merchant cash advances is the cost. While lender’s charges vary, a merchant cash advance could cost you more in interest than other business financing options. Because they are considered “short term” financing, merchant cash advance lenders are not subject to as many interest rate caps and regulations, so their approvals often come tied to a hefty annual percentage rate (APR).
- There could be limitations: Another negative aspect to receiving merchant cash advance is that there may be “fine print” that places limitations on your business while you are fulfilling your obligation. A common restriction to watch out for is wording that will not allow the business to switch credit card processing companies. Other prohibited changes may include things like moving or locations or revising hours of operation.
- Not receiving credit card sales can create challenges: In many cases, businesses receive a mix of credit card payments, cash, and maybe even checks as payment forms. While this is typically not an issue for merchant cash advance companies, they sometimes include a section in their contracts that is designed to limit businesses from offering incentives for non-credit card payments. For instance, providing discounts to customers that make cash payments, in many cases, could violate the agreement.
The most important thing to keep in mind when applying for a merchant cash advance is that it can be a useful tool for certain situations, but it does carry certain risks. Before making the decision to pursue this financing option, make sure that you understand all the requirements and fees associated, and don’t hesitate to ask questions. Once you have all the information, you can determine whether your business would flourish after receiving a merchant cash advance.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.