Merchant cash advance

What is a Merchant Cash Advance?

ByContent Manager

Access to capital is vital for small businesses and growing businesses. Capital can be required to meet many business needs, including paying for operational expenses, supporting growth activities, and allowing your business to innovate and evolve to satisfy changing consumer preferences. It can also be used to meet short-term budget shortfalls or operational emergencies.

Unfortunately, securing capital can be challenging, especially for new and growing businesses. Merchant cash advances are one option for business owners to get funds quickly without having to jump through the hoops required to secure a small business loan. But before you seek out a merchant cash advance, you will want to know the basics of how this option works.

What is a merchant cash advance?

A merchant cash advance is a short-term funding mechanism that allows business owners to get a fixed amount of funding with the understanding that the business will pay back the money incrementally by taking funds from a percentage of daily or weekly sales.

One of the reasons this option is attractive for business owners is that you aren’t tied to making a fixed monthly payment, as you would be with a small business loan. Rather, you can pay it off based on your weekly debit and credit card sales. Setting the repayment amount based on sales means you can still make payments without a penalty while sales are slow. Fixed payments may be a challenge for many businesses during slow periods. With a merchant cash advance, you can still make the payment when you have lower sales; it will just take you longer to repay the advance.

While this arrangement has many benefits, it’s also a good idea to understand some of the drawbacks to accessing capital with this type of funding. An overview of both the benefits and drawbacks is provided in this article.

The benefits of merchant cash advances

Multiple features of merchant cash advances make them desirable for business owners looking to secure capital. These include:

  • The application process is streamlined and requires few resources. Applying for a small business loan means you have to complete extensive paperwork and provide abundant documentation before you can even find out if you are approved. In many instances, the application may also come with a fee, meaning that you are paying with no guarantee that it will eventually provide you with the funding you need. Merchant cash advances usually require substantially less paperwork, and there is typically no fee to apply.
  • This funding is classified as a commercial transaction rather than a loan, which means that they are unsecured and come with no fixed terms. The repayment rate is generally based on the company’s sales history. Additionally, companies can access the amount they need, as these advances can range from a few thousand dollars to hundreds of thousands.
  • You can access the funds quickly. If you are dealing with a budget shortfall or emergency, you may not have the time to go through the loan application process. In these scenarios, merchant cash advances are a great option because the streamlined process means you can access funds quickly.
  • You can access funds even if your credit record isn’t stellar. Business loans often calculate risk based on your application. Unfortunately, you may be denied funding if your credit record isn’t great. Alternatively, you may be required to provide some form of collateral, which can be difficult for businesses struggling with cash flow issues. Merchant cash advances are often much more forgiving based on your previous credit record and have more flexible repayment options.

The drawbacks of merchant cash advances

While merchant cash advances are a great option, you will need to know precisely what you are agreeing to before moving forward. This funding does have some drawbacks, such as:

  • They often come with fees and interest charges. While all capital funding charges interest, merchant cash advances usually have a higher interest rate than a small business loan. This charge is called a factor, and if you aren’t in a position to repay the funds quickly, it can eat away at your profits.
  • This funding isn’t regulated. Unlike traditional loans, merchant cash advances aren’t regulated, meaning they can set the repayment rate or factor at any rate, which tends to be significantly higher than the interest rate of a bank loan.

Merchant cash advances can be an excellent option for securing capital quickly, but they aren’t always the best option. To learn more about all funding options for your business, contact PenCom Capital today!

Penn Commercial Capital can help you secure your next round of financing or business loan efficiently and ethically. We’re proud to champion the small businessperson and can finance clients seeking loans from as little as $100,000 up to $100 million.