A merchant cash advance is usually a significant amount of money that is made available to small business owners who need funding quickly or who have been unable to obtain financing from banks. These borrowers are usually people who find themselves in cash crunches or who need to invest in their companies but do not have credit scores high enough to qualify for traditional small business term loans from banks.
Merchant cash advance companies provide a lump sum of money — in a short period of time — that can be used for many different business purposes, such as making payroll or paying for emergency repairs. The business then repays the loan by forwarding a percentage of its daily credit card transactions or other business receipts..
The cash advance company will continue to collect the specified percentage of daily or weekly business receipts until the agreed-upon amount has been paid in full. Flexibility is a benefit of this type of borrowing; the percentage doesn’t change. Thus, if a business has a slow day, it doesn’t have to pay a set amount. Rather it pays the percentage of sales. On good days, the percentage is the same but because of the greater volume of sales, more money is repaid to the lender.
The funding comes from non-bank, tech savvy lenders who can provide funding in just a few days’ time. With their speed of decision-making and willingness to lend to businesses with mediocre credit scores, the funding often comes with a high cost of capital (a cash advance does not have an interest rate). In many cases, a cash advance is a last resort since it can be one of the most expensive products available to cash-strapped entrepreneurs.
Cash advance amounts range from $2,500 – $250,000. Generally, a borrower must be in operation for 18 to 24 months with annual revenues greater than $150,000.
- Cash advance funding is one of the fastest financing options available – usually just a few days. Cash advance funding can help cash-strapped companies make payroll during a rough stretch or can provide an infusion of capital to close a business deal that might otherwise fall apart.
- Because the decision is weighted most heavily upon the credit card records and bank statements of the borrower, there is a limited amount of paperwork required, which accelerates the decision-making process
- Poor credit is often accepted. This is a huge plus for companies with little or no track record of prompt repayment. (Because lenders get paid directly from business receipts, credit ratings are less important than they are for other types of lenders.)
- A cash advance is an unsecured loan, so you do not need to pledge collateral and you are not personally liable in the event the company is unable to repay the loan.
- Payments are correlated to the health of your business. Because you pay a percentage of sales, you pay less when sales are slower (less revenue = smaller payment) and more when business is good (more revenue = higher payment).
Applying for a Merchant Cash Advance
The documentation required to apply for a merchant cash advance are relatively simple compared to the requirements of a traditional bank loan. The following documents are typically what you will need to complete your application: credit card processing statements, driver’s license, voided business check, bank statements, credit score and business tax returns.
Many business owners are cautious about getting financing from cash advance companies. Because a merchant cash advance is not a loan, there is not interest rate or APR. Rather, the total repayment amount is based on a “factor rate”. This can be more expensive than other financing methods.. Additionally, the daily skimming of credit card revenues hurts cash flow. Thus, using merchant cash advance funding might cause more harm than good in the long run.