You may have heard of merchant cash advances (MCAs) if your business processes many credit card transactions. They’re one of the fastest forms of small business financing.
They’re also a good option for seasonal businesses, as repayments are deducted based on a percentage of sales. This provides more flexibility than traditional business loans with fixed monthly payments.
Flexibility
One of the main reasons that a business cash advance might be a better option than a traditional loan is that it offers more flexibility. This is because a business cash advance doesn’t require any collateral like other forms of financing, and the issuers don’t place as many restrictions on how you can use your money.
Another benefit of merchant cash advances is that they are designed to be short-term solutions to help you meet your financial obligations. They typically work by deducting a percentage of your debit or credit card sales daily until the advance is paid back.
This lets your business repay the funds immediately, ensuring you won’t be in a financial hole if your sales slow down unexpectedly. It also means you won’t have to pay a high-interest rate.
Lower Interest Rates
If you need cash for a small business expansion or to fund daily expenses, a cash advance might be better than a traditional loan. Many businesses face liquidity problems because of slow sales or customers who fail to pay their bills on time.
This makes it difficult for them to stay afloat and make payroll. Fortunately, alternative lenders are willing to offer to finance these needs.
One of these options is a merchant cash advance. This type of funding is repaid by automatically deducting a percentage of credit card receivables from your business. It’s an excellent way to finance future sales but can carry higher interest rates than other business loans.
Faster Approval
One of the most significant benefits of a business cash advance is that it offers a faster approval process than a traditional loan. Most lenders can review your credit application and provide you with funding within a few business days.
Depending on your industry, this could be an excellent option for your small business. It also comes with minimal paperwork and no need to put up collateral to secure the funding.
The factor rate you pay is based on a combination of the healthiness of your business’s cash flow, monthly revenue, and sales. It also includes fees and the percentage of daily revenue or credit card sales a lender will hold back to repay your advance.
Lower Fees
There are many reasons why a business cash advance might be a better option than a traditional loan. One of the biggest is that the fees on a business cash advance are typically much lower.
With a traditional loan, the lender advances you a lump sum at the start of the loan term and then charges interest for as long as you owe them money. This can lead to a vicious cycle of high-interest debt that can harm your credit score.
Unlike a traditional loan, the repayment of a business cash advance is based on future revenue receivables. This allows for flexibility and can be an excellent choice for businesses that make a large volume of credit card sales or are seasonal.
No Collateral Required
A merchant cash advance may be ideal if you are a small business owner with poor credit or no collateral. These unsecured loans have flexible requirements, making them more accessible to borrowers with poor credit histories.
Rather than a loan where you pay back a lump sum over a set period, a merchant cash advance remits a percentage of your future revenue to the lender. This allows you to make repayments daily or weekly, depending on your business’s sales activity.
Despite their many benefits, merchant cash advances are only for some. They are expensive and can wipe out profits temporarily. In addition, they can trap you in a cycle of debt and lead to other financial problems in the long run.