Merchant cash advances provide working capital when you need it, but can carry heavy interest rates for small businesses.
When you receive a merchant cash advance, your business gains upfront working capital in exchange for a percentage of future credit card sales. Merchant cash advance companies frequently partner with card processing companies to hold back a percentage of sales revenue.
Merchant cash advances are not small business loans. You are selling future income in exchange for immediate access to working capital. Instead of collecting payments to cover the advance, the merchant will automatically deduct a set percentage of your credit card sales until they recover the advance. In contrast, other small business loans can be paid back using funds from other accounts, rather than being automatically withdrawn from your sales.
Because merchant cash advances are not loans, these agreements are not held to the same laws that regulate lenders, so interest rates can be upwards of 38%.
Merchant cash advances offer benefits to small businesses, including payment schedule – you only pay back your advance when your business makes sales. If you have had strong sales but struggle with little or bad credit, a merchant cash advance may be a good option for your business.
Your business 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. This segment of the lending industry is not regulated, so it's important to understand the costs up front.
While some small businesses may have turned to merchant cash advances in the past because they had few options to get the working capital they need, online lenders like Kabbage are now a great option for small businesses.
Unlike merchant cash advances, an online loan from Kabbage provides ongoing access to funding – take what you need, when you need it, and only pay fees on the amount you use. You can even pay off your loan early with no penalties, and you won't be charged any fees on the remaining months.
The biggest difference between Kabbage and merchant cash advance companies is the equivalent APR business owners will pay on their business loan. Instead of complicated interest fees, Kabbage charges simply monthly fees between 1.0% and 10% for each month you have an outstanding loan balance. Merchant cash advance companies typically don't publish their interest rates and base them on the borrower's credit rating. That said, the APR equivalent of the payback could be more than 38%.
Qualify for a line up to $250,000
Accessing small business funding shouldn't be complicated or time-consuming, so Kabbage developed a simple way to get up to $250,000.2.