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Cash Flow, Finance & Accounting, Small Business Loans

The Pros and Cons of a Merchant Cash Advance

For small and online business owners in need of fast access to capital to grow their business, business cash advance – also known as “merchant cash advance” – is a solid option. So, what is a merchant cash advance? In a merchant cash advance, a merchant gives businesses upfront cash or capital in exchange for a percentage or a portion of future credit card sales.

Many small or online businesses are in need of merchant cash advances for things such as making payroll, growing inventory, purchasing new equipment/packaging/supplies, marketing or advertising dollars, expansion/renovation of business, rent payments, and more.

If you have had strong sales, but struggle with little or bad credit, a merchant cash advance may be a particularly good option for your small or online business. Getting the capital you need when you need it can mean the difference between the success or failure of your business.

Note: You typically will not qualify for a merchant service cash advance if you have a prior bankruptcy on file, if your business has been in existence for less than one year or if you do not already have the ability to process credit card payments for your customers.

Traditional lenders, such as banks, are often reluctant to extend traditional loans to businesses with poor or bad credit. Such businesses will be deemed “too risky” and will have great difficulty in securing a traditional bank loan for their business needs. This can be a problem for many small or online business owners who need the capital to purchase additional inventory, produce goods, or operate their business. This is where a merchant service cash advance can come in handy. A merchant cash advance gets you the money you need at a fast turnaround time so you can continue to run the day to day operations of your business.

Merchant Cash Advance vs. Business Loan

Merchant cash advances are different from traditional business loans because, rather than having a fixed repayment plan with a set interest rate (similar to how you would pay your car payment each month), merchant cash firms and alternative business loan lenders such as Kabbage recoup their funds by collecting a percentage of the business’ total credit card sales each month. In addition, the business would pay any fees associated with the business loan.

Merchant Cash Advance Benefits:

Get Cash Fast

One of the biggest positive factors for small or online businesses when considering these kinds of business advances is getting the cash quickly. Business cash advances do not take as long to process as traditional bank loans. In fact, some cash or capital can be delivered to the business within hours of submitting an online application. This is good news for business owners who simply don’t have the time to wait for long processing that is typical of many banks and larger lenders.

Little to No Paperwork

Everything is done online. So there’s no lengthy paperwork to fill out, fax, scan or mail. This decreases your wait time and increases your turnaround time.

Repayment is Not a Fixed Monthly Amount

Another benefit when considering these types of advances is that repayment may be easier over time. This may work in the business’ favor, particularly if sales are slow at first, because payments are based on a percentage of sales, rather than a fixed monthly amount. So for example, let’s say a merchant cash advance company offers XYZ Business a merchant service cash advance in the amount of $10,000, with repayment terms of 10% of monthly credit card sales. The first month’s repayment amount is automatically sent back to the company and is a percentage of XYZ’s monthly sales. If the first month’s sales following the advance were $1,500, then XYZ Business would have $150 deducted automatically (via PayPal or other transaction service) to be paid to the company that issued the merchant cash advance. If the second month’s sales were only $900, then XYZ Business would have $90 deducted.

Note: the amount of your loan, or advance, will be based in large part on prior credit card sales. Do your homework and come to the table prepared to show current and prior sales so you can know the terms of your loan completely.

High Approval Rates

This is good news for struggling small business owners who may have been turned down for traditional loans by banks and other lenders. High approval rates from companies offering merchant cash advances means higher chances of securing the capital you need.

Perfect Credit Not Required

This is a big factor for many struggling small or online businesses. As the economy takes dips and swings from high to low, the effects are felt largely by the small business owners. These effects can include dwindling markets, low sales and worst of all: bad credit. And unlike larger corporations with millions of dollars at their disposal, small businesses are often unable to get the capital they need to sustain their business because of their bad credit rating. Companies that offer merchant service cash advances offer a lump sum of money in exchange for future sales, so they can approve these advances with little basis or consideration of poor or bad credit scores. Definitely a plus for business owners.

No Collateral Required

Again, because these cash advances are not like traditional bank loans, there is no collateral for a business to put upfront. Rather, the approval of the transaction is based on the businesses past credit card sales. So, if your sales are strong, you stand a good chance of being approved for a cash advance.

Caveats for Merchant Cash Advances

While there are many benefits to consider about pursuing a cash advance, there are some things to be aware of as well. As a business owner, the decision is always up to you. Only you know what makes sense for your business and what will propel your business forward. With that in mind, here are a few things to consider regarding a cash advance.

Higher Interest Rates In Some Cases

Be sure to thoroughly review the terms of repayment so you know exactly how much you’ll be responsible for repaying.

Unregulated Industry

This segment of the lending industry is not regulated – again, because their repayment terms are tied to future credit card sales. This is why it is critical to do your homework. Reputable companies, such as Kabbage, have a leadership team with years of experience in the industry. This is important when you’re considering additional funding for your business.

Fees

Companies that offer merchant service cash advances can charge a variety of different fees. Ask your provider upfront so you can make the best decision for your business.

The Bottom Line

As you do your homework and research these companies online, you’ll want to consider things such as reputation. Check the Better Business Bureau for ratings and client feedback. Examine their website thoroughly. Look at their leadership team and the experience they bring to the table. Look at their press room or media room to see how they’ve been portrayed in the media. And check them out on social media, too.

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Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.