Merchant Cash Advances
September 21, 2018 | Last Updated on: July 15, 2022

September 21, 2018 | Last Updated on: July 15, 2022
Given the number of small businesses in operation today, it’s no surprise that there are millions of them that accept credit and debit cards as a form of payment, and every single one of those businesses need some way to get their money from the customer’s bank to their own. These payments are facilitated by companies called merchant processors, payment processors, or sometimes merchant acquiring banks. These organizations move funds between the customer’s bank and the bank of the acceptor for a fee – also known as interchange.
The processing companies may offer additional financial services in the form of advances or loans, which can be attractive to a business because they allow a lump sum payment before all of the credit card charge income is received. Like anything money-related, though, merchant advances aren’t always the best or even a good option given a business owner’s circumstances. In this post, we’ll take a look at how merchant cash advances work and when they might be a good option for a business or a bad one.
The basic concept of a merchant cash advance isn’t all that different from that of a consumer cash advance: the advance companies provide funds based on estimated future income and receive a fee or interest in return. Instead of a consumer cash advance which may draw the repayment from a paycheck or some other form of income, the merchant cash advance company simply takes their “cut” from the daily card income that the company generates. Also, unlike consumer advances, merchant cash advance companies do not call or consider themselves lenders. Their services are described more as a sale of future credit or debit card sales.
Merchant cash advances are attractive because repayment amounts correspond directly with the amount of card revenue the business generates. If sales slow and income dips, so do the payments to the merchant cash advance company. Advances are also easier and faster to obtain than loans are, because there may not be the typical credit approval and processing requirements – they generally look at business performance and revenue generation more than personal credit scores. This means that business owners who might not qualify for a traditional loan may have a much better obtaining a merchant cash advance.
There are many reasons that a merchant cash advance may be an attractive option for a business in need of funding:
Of course, nothing comes without a price, and merchant cash advances are not immune to their share of downsides:
When is the right time for a merchant cash advance? The answer depends on quite a few factors, but the one time that is wrong in every case is when a business is struggling to manage their finances in other areas.
As we’ve seen, merchant cash advances can have considerable costs attached to them, so the business owner must weigh their options carefully before proceeding. In many cases, the opportunities will outweigh the costs and the advance will be an attractive option to expand. Merchant cash advances are also a reliable way to bridge seasonal income changes or hire additional staff in preparation for a busier time of year.
When the economy is great and business is booming, it’s easy to assume that good times will continue, but keeping an eye on the future is important when dealing with a financial product that will impact your ability to generate revenue for the foreseeable future.
With any financial product, the costs and risks need to be considered carefully before moving forward. Merchant cash advances are particularly enticing because they offer quick funds, easy approval, and automatic repayment, but that convenience comes at a cost that many business owners don’t understand. A business that is able to support themselves without relying completely or mostly on their card revenues may be in a great position to take advantage of a merchant cash advance, but one that is struggling and truly needs the income from card sales will find that the costs and repayment terms of an advance may be a crippling liability for months to come.