You may be a business owner with a struggling business and are probably looking for options to save your company from going down. The merchant cash advance option may have come to your mind but probably don’t have enough information. This article is dedicated to giving you useful information and taking you through a couple of important points.
1. What is a merchant cash advance?
Merchant cash advance financing is a financing option that involves the loan of a certain amount of money into a business by merchant cash advance providers in exchange for future credit card and/or debit card sales. It is a financial plan that small businesses take up.
Merchant cash advances help them get quick cash which their businesses need. In exchange, they sell a part of their future sales to the merchant cash provider. This means that if the business makes a sale, the sale is divided between the business and the provider company.
The terms are agreed between the two parties but the cut is usually between 10-25% of the credit card sale going to the company while the remaining goes to the company. This becomes an easy way for the business to inject cash flow into its operation and then pay back as they continue conducting business.
2. Functions of merchant cash advances
A merchant cash advance is used by the business for all sorts of reasons. The business may decide to use the cash to pay their employees or repay a debt. Other businesses may use the cash advance for advertisements or fund a promotion campaign. Other uses may include the production of more inventory and stocking up products.
The merchant cash advance is a helping hand for business owners during difficult financial situations. The cash advance becomes a quick solution for these problems.
3. Merchant cash advance is NOT a loan
Merchant cash advance is not a type of a loan. It is described as an exchange of cash the future credit card or debit card sales. It is not considered as a loan and thus treated differently. That is why merchant cash advance providers say that they are not regulated by the loan and interest legislations that have been put in place.
Hence, the interest rates could go higher than you are normally used to. Another difference is that since it is not a loan, the interest rates are not calculated by the annual percentage rate. They are calculated according to the factor rate of the business.
4. Fast approval
Merchant cash advance is processed within a short period of time. With all necessary documentations and credentials, a merchant cash advance could be approved within 24 hours. The deposition of the money into the business account may take up to a week. This is considered very fast compared to traditional loans which have to go through a series of processes before they approve your loan. A merchant cash advance gives you the fast cash for your business. Thus, it is very attractive to small business owners.
5. Pros of the merchant cash advance
A merchant cash advance has many advantages that attract a lot of people. They include the approval time z and the credential factor, among others
- A merchant cash advance does not require many credentials to apply. It’s all about the business and not about the individual. Thus there is nowhere the credit score of the proprietor of the business is in question. The plan solely deals with the business and not the owner.
- The approval time for a merchant cash advance is just lessee than most other loans in the market. It takes a minimum one week to get the merchant cash advance for your business. It’s why merchant cash advances have become so popular.
6. Cons of merchant cash advances
The plan definitely comes with a few drawbacks which you have to be careful of. The drawbacks mostly affect the interest rate of this plan. The plan doesn’t have an annual percentage rate as it is not classified as a loan. It all depends on the factor rates. This means the rate of interest cannot be controlled. There is an important aspect which you may need to know.
The percentage cut that is paid to the company for every sale is not the same as the interest rate. They are two different things and the charges are different band have to be paid. This may cause confusion for the business owner and thus cause frictions in the future.
7. Other factors
This sort of financial plan is has a special characteristic. The amount of money from sales that are going to the company varies. This means you cannot plan for the money that is going to be paid from your business to the company. This plays a con card in this case.
However, this characteristic has a flip side. This is because since the cash is not specified, it means that you are not affected as a business when it comes to the low season of your company. There is no specific amount of cash that is specified that your business has to earn each month. Thus, the merchant cash advance company will get paid when you make sales. This relieves your business from the pressure of having to attain a certain amount of sale each month.
8. Company specifications
In order to attract businesses into their plans, different companies will come up with different offers for your businesses. Thus, you will have to a lot of companies offering merchant cash advances but are customized in different ways to suit different businesses. The key is always to take the plan that works well for your company. It’s all about looking at works with your budget and your sales projections.
9. No collateral involved
Merchant cash advance companies don’t need a collateral as this is not a loan. It is an exchange of future sales for a merchant cash advance. This, collateral becomes irrelevant. It’s all about the agreement put in place when the application of the MCA was done.
It’s all about choosing what works for your business. This plan is very attractive as it’s very simple to understand. However, it has the downside of having very high- interest rates. However, if you can couple with them it’s a plan that could go a long way in making your business a success. It’s all about perspective; what you make of the plan.