Time to Funds
In your search for different business financing options, you may have heard about a product called a merchant cash advance. A merchant cash advance isn’t a loan, but a lump sum payment from a provider that you’ll have to repay over time with a percentage of your sales. If sales numbers are strong, repaying a merchant cash advance could only take a few months with an interest rate of around 20%. If sales falter and the repayment period drags on, your interest rate could get pushed into three-digit territory. That’s an expensive proposition for a business already experiencing a slowdown, and it should make you think twice before signing any documents.
So, is a merchant cash advance a good idea? Read on to help you decide.
A merchant cash advance offers a business owner quick access to capital, but that doesn’t mean it’s always the best option. Let’s take a look at a few instances where an MCA can offer you a solid financial footing, and then we’ll talk about situations where it’s best to look at options other than a merchant cash advance.
Can a merchant cash advance be a smart move? Sure, if:
Maybe you’re running a young business with a track record that’s too short to qualify you for more competitive loans from traditional lenders. Products are flying off the shelves, but you’re still paying off initial startup costs and can’t access the capital you need to replenish your inventory. In this situation, a merchant cash advance could offer you a promising way out because the lump sum will be paid off using a percentage of your reliable sales volume. If the profit margin of each sale is significantly more than the anticipated interest rate, getting a merchant cash advance could help you preserve sales momentum while building cash flow. After you’ve paid off the advance, you’ll hopefully have enough working capital to function—ideally without getting another advance.
Can a merchant cash advance be a bad idea? Absolutely, if:
If business is booming, and you’re confident you can pay back a merchant cash advance quickly, the good news is that qualifying is relatively easy. Compared to other traditional loans that require extensive documentation, a lender will most likely want to look at your daily volume of credit card transactions to decide if you qualify.
Because a merchant cash advance is unsecured, you don’t need to provide collateral assets like business vehicles, an office, or equipment that the lender can repossess if you fail to make payments. As a result, it’s easier to qualify for an MCA, but you’ll need to make a personal guarantee acknowledging that the provider can pursue your personal assets if you fall behind on payments and eventually default.
Getting a merchant cash advance can be a good idea in the right situation, but you should weigh the following pros and cons carefully:
You’re probably wondering, “Is a merchant cash advance a good option for my business?” Only you can decide, but here’s our take: If a merchant cash advance will generate more profits than the cost (or interest rate) of the advance, it’s worth considering. Once you’ve established a reasonable return on investment, your next step should involve researching how a merchant cash advance compares to some of the other financing options available to your business.