It’s a fact of life: every now and then, small businesses need a cash infusion. Unfortunately, the chance of a business needing cash at a time when their credit is perfect and they have time to wait is unlikely. This means a traditional bank loan probably isn’t an option. But a funding source that’s gaining in popularity for businesses that need fast capital is the merchant cash advance. Here’s what small business owners need to know if they’re considering one.
How Merchant Cash Advances Work
A merchant cash advance is financing based on future profits. Also known as credit card receivable funding, merchant cash advances provide money to the borrower in exchange for automated repayment by way of a percentage of credit card transaction sales. This can be a great way to keep business running if cash flow is low due to various issues that arise at a small business. A large buyer might be late on payment or sales could be suffering due to outside issues like that of a natural disaster like a hurricane. Understanding that the business has the option to get cash quickly could not be more important. This can allow them to conduct business without worry in certain situations that they would have been hesitant to do in the past.
There are several factors that make a merchant cash advance an appealing financing option for borrowers. Firstly, it’s possible to qualify for one with a lower credit score than a bank would consider. While a higher credit score always helps, in this case, it’s not the bottom line. Consistent monthly revenue amounts are the biggest consideration
Merchant cash advances also do not require collateral, and the approval process is typically quick. In many cases, a business may have their funds transferred to them within 24 hours of applying! This is imperative when cash flow is low and things like employee salaries need to be paid.
Even the repayment process for a merchant cash advance is simple. So much so that many businesses don’t even notice it! As we said before, the process is automated, and the financing is based on credit card transaction sales. A common repayment structure is “split funding” in which the payment is taken directly from credit card receipts and automatically processed by the lender. This option is very appealing to seasonal businesses because the business only pays when people are buying. The percentage is agreed-upon in advance, and continues until the balance of the loan is paid off.
Repayments can also be done through ACH (Automated Clearing House). In this structure, the lender has access to the borrower’s business checking account and deducts a set amount each week or month. In either case, the payment is automated, and if the merchant cash advance funds help their profitability, they’ll barely notice the payments impacting their bottom line.
Owning a small business is hard work, and no two companies are alike. Traditional funding sources simply have too rigid a structure to accommodate the needs of many small businesses. Merchant cash advances put money into the hands of business owners quickly and easily and can be used for nearly any business expense.