Merchant cash advances have become popular over the recent year. The product started as solution to finance credit card sales in the future. However, this product has evolved into a solution that allows companies to fiancé future sales of almost any kind. The term business cash advance is a better description.
What is a business cash advance loan?
The idea behind a merchant cash advance, or a business cash advance, is that you can sell your future sales and get funded quickly. With this short-term solution, it takes a few months to pay it back.
Repayment begins immediately. The cash advance provider takes a portion of your ongoing sales or it debt your bank account every day. Due to this structure, the product is more similar to a short-term loan than a line of credit. Although this product is often referred to as a business cash advance loan, providers often state that the product itself is not a loan.
Credit card sales vs. commercial sales
The cash advance provider determines how much to advance your company by reviewing your past sales. The provider reviews past credit card transactions or analyzes your bank statements.
Most cash advance companies fund anywhere from 80% to 150% of your average monthly sales. This amount varies by provider and is also based on the financial strength of your company.
Repayment of the cash advance loan
Repayment of a cash advance is somewhat similar to that of a term loan. You get the funds upfront, and then you make regular payments until the outstanding balance is paid off.
Advances based on credit card sales are repaid by sharing your future daily revenues with the cash advance company. The percentage rate of your revenues paid to the cash advance company is called the “retrieval rate.” Retrieval rates range from 8% to 13% of your sales and are handled by using split processing with your card processing company.
Advances on regular sales are repaid through bank account debits. The cash advance company debits a fixed amount from your bank account every business day until the funds are paid off.
Pros and Cons
Just like any financial product, there are pros and cons to business cash advance loans. The biggest disadvantage is that this product is often used to solve the wrong problem. Companies that have cash flow problems will not usually get long term benefits from a short-term solution because of how the solution is structured.
Cash advances are expensive. Unless your business has high profit margins, cash advances could wipe out profits temporarily. Sometimes the payment schedule of the cash advance can get the company get into new financial problems. Business owners get a second cash advance loan when this occurs. The second loan helps them meet the payment obligations and provides some funds for the business, but it is only temporary.
Having multiple cash advance loan is called staking and is very risky. It leads often times to failure of the business unless the loans are paid off through debt consolidation or some other means.
It is much easier to get a bash advance than a bank loan. And most accounts can get approved and funded within days. This quick turnaround makes cash advances a solution for companies that have very urgent needs. A business cash advance loan could work if your company has an opportunity with a quick payoff.
An alternative solution that works well for small business owners are SBA microloans. This is available to business owners who have little to no credit and can provide up to $50,000 in funding. Loans often come bundled with training and consulting, which can be very useful for small business owners.
Also, consider factoring your invoices if you sell to commercial clients and have problems because they pay you in 30 to 60 days. A factoring program allows you to finance slow-paying invoices, which improves your cash flow. This type of financing is ongoing and relatively easy to get. The factoring line can increase as your sales to commercial clients grow.