How Merchant Cash Advance Work

Jason Hunt
October 16, 2017
If you’re a small business owner and you need quick cash for settling expenses then one of the options you may have is merchant cash advance. Although a relatively new industry that started about 10 years ago, today, more than a million businesses are ready to receive quick working capital. Presently, the situation has changed due to the pandemic yet essential businesses too, need quick funds for sustainability.

How does this quick business loan scheme work?

Cover all your current expenses by sharing your future sales on credit.

In exchange for a share of your future sales, a merchant cash advance broker will give you a lump sum payment upfront.

Small business owners with strong credit card sales profiles, may qualify, especially if they have little to no collateral or if they have a spotty credit history.

Again, this isn’t necessarily bad, especially if it’s a short-term arrangement.

You simply have to have to keep your business going or cover a temporary cash shortfall, but it can get you in the red very quickly if you try to use it as your only source of capital.

In essence, you could sell future profits right out from under you; therefore, these types of cash advances need to be used very prudently by those who take advantage of them.

Things to Remember Before Applying for Merchant Cash Advance Loans:

Analyze the costs and benefits before applying for merchant cash advances.

If you decide to borrow cash advances from a broker, make sure you understand that it is basically a loan with general characteristics and interests as that of any bank loan.

These companies will say that this is not a loan, and technically, they are right.

What they’re really doing is buying future profits from you in exchange for a lump sum percentage of those profits upfront.

Again, that’s fine…

Just don’t sell your business out from under you by selling future profits to a point where you’re actually going to see little to no profit yourself because you are paying those companies back from your profits.

Second, remember that merchant cash advance companies are not bound by the same rules and regulations that control traditional banking institutions, and limit the interest rates they can charge you.

As a result, you have to be very careful and read the fine print to make sure you can afford a cash advance without losing all the fortune.

Advantages of Quick Business Capital:

There are advantages to acquiring quick business capital, too.

Attain your business goals through merchant cash advance loan scheme.

With a traditional loan (albeit with a lower interest rate and fees), you pay back what you’ve borrowed on a fixed schedule of monthly, regardless of your income.

What you’ve borrowed is paid back commensurate with your income flow, i.e., if you have a slower month, you pay back less; in a more profitable month, you pay back more.

Is This Right For You?

It really depends.

If your business is usually very solvent and you’re just having a slight cash flow problem temporarily, or your business is expanding, therefore, you’re seeking extra cash now, then taking advantage of a cash advance company is probably going to suit your cause.

However, if your business is already struggling and you are considering using a cash advance to keep going until things “pick up,” it’s probably not a good idea for you. \

What will end up happening in the latter case is that you will simply sell all your profits out from underneath you and will likely never catch up.

Therefore, only use cash advances when you are in a flush and solid position financially already and simply need some extra cash in the short term.

Done right, they can certainly help you out when things are “just a little bit tight” on a temporary basis.

Checking out cash advance companies carefully

Perform thorough auditing across all possible channels for assessing a broker ready to loan out a cash advance.

If you do decide to go with a cash advance company, make sure you read their conditions/terms thoroughly first.

Although industry leaders are trying to cultivate “best practices” so that they remain above board and in full regulation, many third-party brokers are still shady.

These people are major sales avenues for the industry, but the cash advance industry says that potential customers should be careful.

They may not be above board; instead, work with a cash advance company directly.

Here to stay?

With the recent economic downturn, cash advances are becoming more attractive for essential business owners seeking business loans. Nonetheless, even in times of prosperity, they can be useful for already profitable business owners.

Used properly, they are a good alternative to traditional lending when that’s not available for whatever reason

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Jason Hunt

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