The Basics of Merchant Cash Advances
Merchant cash advances encompass several types of financing options for small businesses. Unlike traditional bank loans with longer and larger payment terms, repayment terms are short and regular. Many people think they’re loans, but they’re actually advances based on future credit card or revenue sales. Lump sums are exchanged for a portion of a business’s daily future debit and credit card sales.
Pros and Cons
The upsides of merchant cash advances are many. They include no payoff dates or interest rates, no fixed monthly payments, no collateral, and no chance of a late payment (payments are automatic). There’s little paperwork involved, and you get quick access to your funds. The credit requirements are lenient, and payback requirements are relative to income. It decreases the burden on your business. However, they are also are more expensive than traditional financing, not as subject to regulation, and are best regarded as a short-term solution.
In general, qualifications for merchant cash advances are more dependent on daily credit card receipts than credit scores. Being in business a minimum of 12 months and at least 15k monthly revenue are standard qualifications. This type of funding is best for businesses with high numbers of transactions per month, such as retail stores, salons, restaurants/bars, and B2C companies.
The first step in the process of securing a merchant cash advance is to agree upon terms with your provider regarding advance and payback amount and holdback percentage (the amount the provider takes from your sales). Then the advance is transferred, and the agreed-upon holdback is witheld. When advances to the provider are paid in full, holdbacks stop and the process is complete.
Merchant cash advances aren’t loans, but sales. Therefore, they don’t fall under usury laws that are designed to protect customers by capping interest amounts and are a largely unregulated market, being only subject to the Uniform Commercial Code that varies according to state. This type of market allows providers to set a wide range of interest rates. Be sure to check your terms meticulously.
Average cash advances can range anywhere from $10,000 to $1 million — that’s a significant amount of money to gain access to if your business needs it. Always keep in mind that due to a lack of regulation, interest rates will be significantly higher than regular loans.
Merchant cash advances are a quick way to get access to cash. Consider these basics as you plan.