When a Merchant Cash Advance Makes Sense

No matter how big, small, or prosperous a business may be, there always comes a time when the business is in need of cash. The need doesn’t always arise in the startup phase it could occur years later during a renovation project. When or how it happens is irrelevant, it is the course of action chosen by the business owner to deal with the issues that matter most and in reality make or break the business.

Merchant cash advances have been growing in popularity over the years as a short-term solution to business financing because they promise to provide easy access to funding for businesses in need. The decision for a business to utilize a merchant cash advance is an individual one because there isn’t a one size fits all solution when it comes to financing a business. What may be relative to one business may not be relative to another. Although, businesses access to merchant cash advances is easier than any other type of funding it isn’t without risk because they can be a very expensive option. In fact, the expensive and short term nature of merchant cash advances can be dangerous and costly for businesses if used incorrectly. But, when used properly, they can open a lot of doors for businesses that would have otherwise remained shut.

Benefits of merchant cash advances:

  • High approval rate – Approximately 50% of all businesses that apply for merchant cash advances are approved whereas only 20% of businesses that apply for small business loans are approved.
  • The approval process is quick and easy – From start to finish the entire process usually only takes a few days, whereas the approval for small business loans can take months.
  • Requires minimal documentation – Typically, lenders will only request less than 6 months of bank and credit card statements and a copy of the business ownership, lease, or rental agreement.
  • Doesn’t require perfect credit – Although, a business’s credit score is evaluated during the approval process the actual score isn’t the determining approval factor the credit and debit card sales are.
  • Disadvantages to merchant cash advances:

  • Repayment terms are based on probability and predictions rather than a set payment.
  • Borrowers are penalized for early payoff. The longer it takes for a borrower to repay the money the less interest they are charged.
  • Merchant cash advances have higher interest rates than typical small business loans.
  • All businesses have needs and the ability to meet those needs usually comes down to two issues, assets and capital. Areas in which it makes the most sense to utilize merchant cash advances are:

  • The business needs access to capital quickly.
  • The business has an opportunity to receive a discount on inventory, but needs to respond to the offer quickly.
  • The business has a special marketing opportunity.
  • A businesses probability of long-term growth outweighs a short-term loss. In other words, if a business owner is aware that he is going to have some loss from the merchant cash advance, but there is a strong, reasonable, and realistic probability that the venture will lead to the long-term growth of the business the risks that are associated with merchant cash advances are worthwhile for the benefit of the business.
  • Businesses that have a steady and strong flow of credit and debit card transactions, but have blemished credit or limited capital are the best candidates for merchant cash advances because it gives them opportunities that they may not be privy to through traditional lenders.
  • When do merchant cash advances not make sense?

    Merchant cash advances aren’t appropriate solutions for businesses that have ongoing issues with cash flow nor are they appropriate for businesses that have extended payment terms. For example, a business that only requires payment once a month can’t afford to repay a lender daily because the business doesn’t have a steady daily income. This would leave the business vulnerable and would drastically cut into the business profits throwing the business into a financial crisis, leaving the business in a much worse situation than had it utilized a more traditional form of funding.

    When looking into financing business owners should take the time to educate themselves to all options and alternatives and make an informed decision. A business finances should always be taken seriously and never for granted. Therefore, should a business owner feel that a merchant cash advance is the best option for his business there are a few suggestions that might help in the lender selection process:

  • Don’t settle for the first lender among available choices – The business owner should contact a minimum of two companies and make it known to all of the companies in the decision pool that he is considering other options and companies.
  • Negotiate, negotiate, negotiate – The business owner should look at all of the terms offered by each of the lenders in the decision pool and determine what terms he is willing to accept and present them to the potential lenders. The lender who is more willing to work with the business owner will be more beneficial to a company than one that will not.
  • Business owners who are negotiating terms with a lender would better benefit from focusing on lowering the retrieval rate than the factor rate. By lowering the retrieval rate businesses lower the amount of money they are required to repay each month, reduce the APR, and lengthen the repayment terms.
  • Merchant cash advances have both good and bad qualities. It’s important for business owners who are evaluating this funding option not to lean too far to either end of the spectrum from being blinded by the advantages or terrified by the disadvantages. Instead, it’s imperative that business owners focus their energy on determining whether their credit and debit card sales are stable and strong enough to adequately repay the borrowed money. Merchant cash advances can be a quick and uncomplicated way to access needed capital.