Running a small business can be challenging, but it also can be extremely rewarding. Some small business owners even take it to the extreme by making sure they only frequent other small businesses.
But when it comes to financing a small business, some options are better than others. In the end, it comes down to what you need the cash for. In the case of merchant cash advances, there are a few things that all business owners need to know. As the saying goes knowledge is power, so having a complete understanding of how merchant cash advances work will help you add this useful finance tool to your arsenal.
Merchant cash advances have been around for a long time. They predate the financial crisis and even the internet, though they weren’t called merchant cash advance at the time. The premise is simple, get cash today for your future credit sales and then pay off the advance from a percentage of your credit card sales going forward.
These advances can be useful when looking to meet short-term financing requirements. What makes them so attractive is the fact that traditional banks are largely unable to service this community. It is a shame. According the U.S. Census Bureau, firms with fewer than 100 employees account for nearly 50% of all private sector payrolls. As you can see, there is nothing small about small business.
Unfortunately, the big banks do not feel the same way. Part of the reason is cost of processing loan requests for small businesses. Basically, the processing cost of one $5 million loan is the same as one $50,000 loan – but the banks can make a lot more money on the bigger loans.
Whilst other options have cropped up in recent years. Loan programs such as the Small Business Administration’s (SBA) express program can actually take several weeks to complete and business owners need to spend a lot of time working on a mountain of paperwork. Let’s face if you are running a small business, you don’t have time to wait.
So when a small business owner needs cash fast, they will often turn to a merchant cash advance lender. These unsecured loans are a convenient and cash-flow friendly way to access cash quickly. The application process is often as easy as supplying a business’ merchant processing statements, and bank statements. From there a lender will approve a loan amount based on a percent of future credit card sales. In this way, a business owner can get $20,000 today by pledging $25,000 of future credit cards sales.
While the rates are high, it can be a useful tool when a business needs cash fast. However, the temptation to turn to merchant cash advances to finance every business need should be resisted. Remember, short-term loans for short-term needs as loans usually need to be repaid within six months or less.
Granted the rates are higher than other loans, but merchant cash advances can be useful option when faced with a liquidity emergency. Another plus of a merchant cash advance is that the balance is paid every day until it is paid off. What this means is that you don’t need to save up for a monthly payment and if sales are slow on a given day, you just pay a little bit less.
So what should you look for when considering a merchant cash advance? First, you want to compare lenders. Look at their rate and fee structures, how will the advance be funded, and how will it be repaid.
Check the fine print. Compare programs, as not every merchant cash advance, is equal. Some will take a fixed amount every day, while others will take a percent of credit card sales every day. When comparing, ask for the annual percentage rate (i.e. APR). This will help you to compare rates between lenders to figure out which one is the best fit.
In the end, remember that merchant cash advances are a short-term finance solution and should not be used to finance large-scale capital expenses. Instead, these advances are best used when you need cash quickly and then can pay off the loan quickly. Remember to search for the best deal. Compare terms and rates to see which program is the best fit for you and, if possible, try to talk to past clients to get a feeling for their experiences.