Small Business Merchant Cash Advance Guide

In the landscape of small business financing, entrepreneurs often seek avenues that offer quick access to capital to sustain and expand their operations. Amidst the array of options, merchant cash advances stand out as a viable solution for small businesses needing immediate funds.

Read this guide for more information on:

What is a merchant cash advance?
Benefits of using a merchant cash advance
Factors to consider before getting a merchant cash advance

What is a Merchant Cash Advance?

A merchant cash advance is a type of financing that provides small businesses with a lump sum of cash in exchange for a percentage of their future credit card sales. Contrast this with traditional loans, which involve fixed monthly payments.

Benefits of a Merchant Cash Advance

Faster Speed

Unlike traditional loans, which can take weeks or even months to be approved and disbursed, small businesses can obtain a merchant cash advance within days. This can be crucial for businesses that need quick access to funds for emergencies or time-sensitive opportunities.

Greater Flexibility

Instead of fixed monthly payments, the merchant cash advance is repaid through a percentage of the small business’s credit card sales. This means that the repayment amount will be lower during low sales periods, relieving some of the financial pressure on the small business.

On the other hand, during periods of high sales, the repayment amount will be higher, allowing the small business to repay the advance more quickly.

Different Qualification Requirements

Traditional loans can require small businesses to offer collateral or have excellent credit to qualify. In contrast, merchant cash advances are based on the small business’s sales volume, making them accessible to a broader range of small businesses.

When Should a Small Business Consider a Merchant Cash Advance?

Emergency funding: If a small business faces an unexpected expense or cash flow shortage, a merchant cash advance can help bridge the financial gap.
Expansion or renovation: A merchant cash advance can provide the necessary funds if a small business wants to renovate its premises.
Opportunity for growth: If a small business has an opportunity for growth but lacks the necessary funds, a merchant cash advance can provide the capital needed to fuel growth.
Unpredictable revenue: A merchant cash advance can provide stability if a small business operates in an industry with unpredictable revenue, such as hospitality or retail.

Factors to Consider Before Getting a Merchant Cash Advance

While a merchant cash advance can be a valuable financing option for many small businesses, certain factors should be considered before making a decision.

1. Reputation of the Lender

Before entering into an agreement with a lender for a Merchant Cash Advance (MCA), small businesses should research their reputation and credibility. Small businesses should get connected with an MCA lender that’s transparent about their terms and fees and offers clear communication throughout the application process.

2. Cost of Capital

Merchant cash advances often have higher fees and interest rates than traditional loans. Before obtaining a merchant cash advance, small businesses should carefully consider the cost of capital and assess whether the benefits outweigh the expenses.

3. Impact on Cash Flow

A merchant cash advance can have a significant impact on cash flow. Small businesses should calculate the percentage of their daily credit card sales that will go towards repaying the merchant cash advance to ensure that it is manageable for their operations.

Merchant cash advances offer swift access to capital with flexible repayment terms, making them a valuable option for small businesses. However, it’s essential to vet lenders, consider costs, and assess the impact of cash flow before proceeding. With careful planning, businesses can leverage merchant cash advances to fuel growth effectively.

Roberta Silverglate, California Business Journal