Cash Flow

Merchant Cash Advances Explained

The financing options available to small businesses appear to be expanding all the time, which is excellent news for those businesses that require a little financial help to get them through a tough time.

There are risks associated with these options, but as long as you understand them you should be able to negotiate those rocky waters and come out the other side with a thriving business.

If you’re a small business owner currently suffering from cash flow problems and have been weighing the pros and cons of various funding options then a merchant cash advance could be a legitimate option you might have yet to consider.

What are merchant cash advances and how do they work?

Whilst it might operate in a similar manner to a loan, a merchant cash advance isn’t technically a loan. Instead, it’s a form of exchanging your business’s future sales for immediate capital.

So, what you’re essentially doing is borrowing revenue that you haven’t earned yet.

For this reason, merchant cash advances are most often used by businesses that rely on seasonal trade and require help in the ‘off-season’ to keep them afloat.

They’ll also allow organizations to pay wages and keep things running in periods when business is generally slow.

They are also often used by businesses with poor credit scores, as they are offered on projects credit card sales, not past experience. Merchant cash advances can also be used to finance marketing campaigns or general business expansion.

In a similar manner to a bank loan, however, businesses will have to pay back their advance based on a factor rate agreed upon by both parties.

So, if the advance was £10,000 at a rate of 1.2, for example, the business would eventually need to pay back £12,000 of their eventual credit card sales. In that regard, it functions very much like an interest rate.

What are the pros and cons?

Generally speaking, merchant cash advances can be an incredibly useful option for businesses that might not have many other legitimate choices. However, before pulling the trigger, it’s important to understand the pros and cons of a merchant cash advance.

Pros

  • You’ll receive a lump-sum payment right there and then, which can often be the most desirable aspect of such an option.
  • The amount you’ll be able to receive and the amount you’ll need to repay will depend on your sales, not your credit score.
  • Not only is it easy to qualify for a merchant cash advance, but it’s also an incredibly speedy process; far faster than a comparable bank loan.

Cons

  • Typically, merchant cash advances are more expensive than traditional loans.
  • Struggling businesses might end up backing themselves into a corner with a large advance they will never be able to repay.
  • The requirements set forth by the lender are often quite restrictive.

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