When is the right time for a business cash advance?
At one point or another, almost every small business owner has to consider taking out a small business loan or taking a business cash advance. The obvious time is during the startup phase when entrepreneurs need funding to get their ventures off the ground. Startup funding covers everything from signing leases, buying equipment and inventory and hiring general contractors. At this stage, the entrepreneur generally has an idea of how much money will be needed, but should borrow more than that amount because, inevitably, delays and unexpected costs will arrive.
During times of growth, funding is needed for expansion, perhaps new equipment to keep up with demand or the opening of a second location. Typically, expansion is something that is in the works for a while, and the small business owner has enough time in advance to apply for an SBA loan, which mitigates risk for the lender through government-backed guarantees so that borrowers will have an easier time securing capital.
Many businesses, no matter how well run they are, run into periods of cash crunch. At such times, quick financing becomes essential to survival. While banks are the traditional source for financing needs, they don’t always react very quickly.
In these cases, there are sources to get funds fast, and with little red tape. A business cash advance may be an option. Of course, the tradeoff for speed and convenience is higher cost of capital than traditional bank financing. Here are two common non-bank sources of quick cash:
By selling open invoices to a factoring agency, a company can collect a portion of its outstanding total immediately. The difference between what the borrower receives and the invoice amount is the amount that the factoring company keeps.
Once a business signs up for a factoring account, it can apply for cash at any time and have the funding within a day or two. Keep in mind that the factor rates for this type of financing is quite high.
It’s a Catch-22, a small business owner can obtain financing when he or she is in a cash crunch. It comes quickly, and credit scores don’t matter as much to this type of funder. While the much needed injection of cash comes to help a business get through a rough spot, the repayment terms are high. It’s a type of funding that one does not want to use often because of the steep cost of capital.
A Business Cash Advance or Merchant Cash Advance
Merchant cash advance (MCA) funding is similar to factoring, except it works with credit card receivables and other business receipts. An MCA company provide a sum of cash based on an expected number of merchant accounts receivable. Typically, a cash advance company will take an agreed upon percent of each credit card transaction until the business pays back the agreed upon amount.
For example, if a company borrows $10,000, then and agreed upon percentage of its credit card transactions will go to the MCA company until an amount of $12,000 is repaid. This enables the borrower to get money in 24 to 48 hours, and the payback time is tied to the success of the business. It depends on how long it takes to reach the amount that is owed.
The best thing is to keep your company in solid financial shape as is best possible so that the need does not arise for quick cash. That means keeping control of inventory and staff hours, regularly reviewing cash flow, getting invoices out to clients in a timely manner to help ensure quicker payment. After all, clients will rarely call and say, “Hey you forgot to send me the bill.” It is the business owner’s responsibility to make sure invoices are sent out promptly.