One thing that sustains a business is regular cash flow. However, there are times when businesses struggle to maintain a regular cash flow. When this happens, they rely on loans to manage the day-to-day affairs of the firm. Merchant cash advance is one of the common ways with which a firm can acquire fast cash for their business. Merchant cash advance is not a loan; it is an advance against the borrowing company’s future sales. The lending company will offer you a lump sum and then you will make daily payments. Repayments start immediately after the cash has been dispensed. The daily payments are made through credit card sales and the rate is dependent on your credit card sales as well. The rate is usually 5% to 20% and it is usually referred to as the retrieval rate or withholds.
You will need to provide the following when you apply for a merchant cash advance: a driver’s license, bank statements, void business check, business tax returns, and credit card processing statements.
How Merchant Cash Advance Work
- Straightforward Application
In most cases, you can complete the entire process online. You can also upload all the documents such as tax returns, account statements, and proof of ownership. The lender will also inform you about the status of your application.
- Fast Funding
One feature of merchant cash advance is fast funding. Once the lender approves your request, you will receive the cash in your account as soon as the process is complete. This takes less than a week.
- Good credit score is not a prerequisite for a Merchant Cash Advance
With most business loans, lenders request for good credit scores. They consider both business and personal credit score. However, with merchant cash advance, the lender will not focus on your credit score. They will look at your business credit card sales and your annual revenue. They also look at the number of years you have been in operation. The lender may also look at your debt your ratio. You should, however, note that merchant cash advance cannot help you build credit. This is because most lenders do not report to the credit reporting bureau.
- Flexible Payments
Merchant cash advance is unlike small business loans. Small business loans have fixed monthly payments and you will need to make payments whether you have made sales or not. Your sales do not determine the amount you pay. Even if you have not made enough sales for the month, you will still need to make the same monthly payments. This can be helpful when you are budgeting but when you make slow sales, you will struggle to make payments. The payments for merchant cash advance, on the other hand, is based on a percentage of your sales. That means that your payments will reduce when you have slow sales and it will increase when you have high sales.
- High Borrowing Limit
Some merchant cash advance companies can offer up to $2 million. It will be difficult to get this much from traditional companies. If you need a high amount, you will need to look for lenders who offer that much.
- No Collateral needed
With merchant cash advance, if you do not have a collateral, you do not need to worry since there will not be a need for one. This also means there is no risk of you losing your home.
- Straightforward Application
Who Should Consider Merchant Cash Advance?
Merchant cash advance is ideal for businesses who make a lot of credit card sales. This funding option is great for the restaurant business and retailers since most of their customers make credit card payments. This funding option is also great for borrowers who do not have a strong credit history. For term loans, lenders usually request for a solid credit history. They need to confirm that you are someone who makes regular payments when you take a loan. if you are a new business owner, you will not be able to produce a solid credit history. That alone can disqualify you from getting a term loan. However, if you have made enough credit sales, you can qualify for a merchant cash advance even without a solid credit history.
Alternatives to Merchant Cash Advance
- Term Loans
A term loan is a popular form of funding for businesses. With term loans, there is a fixed term and the amount you will get depends on your annual returns. The APR may be variable or fixed. Usually, the APR depends on your credit score. If you have a higher credit score, you will get loans with lower APR. the repayment of term loans depends on the amount and the APR. You can repay the loan in 1 to 10 years depending on the arrangement with the lender. When you request for large amounts the lender may request for a collateral.
- Business Line of Credit
A lot of businesses also rely on a business line of credit for funding. With a business line of credit, the firm will be approved for a pool of funds. They can draw from that pool whenever they need funds. One good thing about the business line of credit is that the lender does not charge interest on the entire business line of credit. The interest is only charged on the funds you draw from the pool. With a business line of credit, your balance revolves. This means that when you repay the funds you draw, your account limit increases again.
- Invoice Financing
Invoice factoring is another option for people who are struggling to maintain a regular cash flow because their customers have not paid their invoices. With invoice financing, a lending company will finance up to 95% of your unpaid invoice. You will then repay to the lending company when your customers pay their invoices. There are fees and interest rates applied to invoice financing. There is another option called invoice factoring. The factoring company will buy your unpaid invoices at an agreed percentage. If you decide to choose invoice factoring, make sure you only sell invoices from reliable customers. Customers who are likely to repay their invoices on time.
- Term Loans
Although merchant cash advance is a reliable form of financing, it is expensive. The costs involved can offset the benefits you will get from it. It is advisable that you do your calculations before applying for a merchant cash advance.