For some small businesses, merchant cash advances can be a great alternative to a traditional small business loan. Merchant cash advances (MCAs) provide quick money (usually in as little as 1-2 days) with relatively little paperwork and without required collateral, and can potentially provide a big boost for your small business.
Keep reading for a breakdown of MCAs and an analysis of whether one might be right for your small business.
What is a Merchant Cash Advance, and How Does it Work?
A merchant cash advance is similar to an advance paycheck for your business. Sometimes called a “business cash advance,” your business receives a certain amount of money, anywhere from a few thousand dollars to $100k. Instead of paying the sum back as you would a typical loan, however, the cash advance company takes payment by taking a percentage off your future credit and debit card sales until the money is paid off, usually with the goal of paying off the entire sum in less than 18 months.
There is an alternative to paying back the sum that doesn’t involve giving up a percentage of your sales: using Automated Clearing House withdrawals, which can be taken off daily or weekly until the amount is repaid. This option is especially good for business whose sales do not primarily come from credit or debit cards, and has made the MCA increasingly popular in recent years.
Either way, the total sum of money you’ll need to repay depends on how much money you initially borrow, as well as the risk factor assessed by the cash advance company, which is usually assessed somewhere in the range of 1.2 and 1.5. For example, imagine that your business needed $30,000. If the cash advance company assessed the risk factor at 1.25, you would need to pay back a total of 37,500, which comes out to $7,500 in factor fees. While this amount is higher than what one might pay for a typical small business loan, it’s worth considering if the inherent benefits in an MCA outweigh this cost.
Pros and Cons of MCAs vs. Loans
Merchant Cash Advance (MCA)
Traditional Business Loan (TBL)
|1-2 days||2-3 months||MCA|
Difficulty in Qualifying
|Easy||Depends on credit score||MCA|
Benefit to Advance Payments
Funds Can be Used On…
|Anything||Anything except debts or real estate||MCA|
|Factor Rates (typically higher)||Interest Rates (typically lower)||TBL|
Pros of Merchant Cash Advances
As opposed to traditional types of business loans, which typically take 2-3 months, an MCA can get you cash in hand in as quick as one or two days. Credit score requirements are also much more flexible, and required paperwork is usually less. You don’t have to worry about losing your house, either, as there is no collateral required to enroll for an MCA. Depending on your payment structure, you may find an MCA more accommodating–if credit and debit revenue is less in any given month, you’ll have to pay less that month as well. Finally, an MCA is a little more flexible than the traditional small business loan when it comes to requirements about spending. While some banks won’t allow you to spend your small business loan on real estate or paying off other debts, there are no business expenses that are off-limits when it comes to how you use your merchant cash advance.
Cons of Merchant Cash Advances
While borrowers of a typical bank loan can sometimes save on interest payments by paying in advance, this is not the case for MCAs. As mentioned above, the overall cost of an MCA is typically more than a traditional bank loan. Finally, if payments are structured to take a percentage off of future sales, the MCA inherently will lead to a reduction in revenue generated by the business in any given month, until the MCA is paid off.
While traditional bank loans are usually a little cheaper in the long run, merchant cash advances provide distinct benefits that often appeal to small business owners. A quick surge of funds and an easy approval process, without having to put up any collateral is a very enticing combination for any small business owner. Ultimately, the decision of whether an MCA is right for your small business rests in the hands of every small business owner, and very often will depend heavily on his businesses’ current circumstances. Any experienced merchant cash advance company can explain the process to you in more detail for you and help you understand if it’s right for your business.
To speak more with an expert about whether a merchant cash advance is right for your business, fill out our instant business loan quote form now.