Running a small business is many things, but often it is not predictable. Some people pay, some don’t. Sometimes business is booming, sometimes not. Sometimes there is plenty of cash, and sometimes not. Very often, there is plenty of business, but there is a great lacking in cash. This gap in cash flow can cause a multitude of problems. Regardless of how great business is, if there is no cash, bills cannot be paid. One option that some business owners turn to is a merchant cash advance.
What is a Merchant Cash Advance?
One thing that is predictable is that, if you accept them, customers will pay with credit cards. This is fine, except for the fact that if a majority of your payments are with credit cards, there could end up being a pretty significant cash flow gap. With enough customers paying cash on time, times could get dire while waiting on the deposit from the credit card company. A merchant cash advance is a transaction in which a merchant cash advance company pays the business owner the cash and then collects the money from the credit card company in exchange. A key benefit is the speed at which you can get the financing. If you need money quickly, cash advance is often the best solution.
What’s the Catch?
It sounds easy, but there is a catch. The cash advance the business owner receives is not for the full amount owed. For example, the total amount may be $30,000, but the cash received may be only $25,000. The advance company collects the entire $30,000, therefore making a $5,000 profit. Still, there is no denying that cash is cash, and if you need it, it may be worth it.
Cost vs. Benefit
It is important to determine the cost versus the benefit of a merchant cash advance before moving forward. Most would agree that it is a very viable option that works, but it should be used primarily as a last resort. Certainly, cash advance should be a temporary solution while looking for a more permanent fix for the bigger problem.
Correct whatever is causing the cash flow gap, such as outstanding invoices, poor A/R collection methods, or simply a lag in business. Fixing the problem is much more beneficial that taking out multiple advances. The cost may outweigh the benefit in the short term, but in the long run the loss in revenue from the discounted sale is going to catch up to you.
If it seems a merchant cash advance could help your business, Biz2Credit can help. Our network of over 1,200 lenders includes many that offer this service, and our professionals are standing by to hook you up with just the right one. Visit Biz2Credit.com today for more information.