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Business Cash Advances: How They Work

As a business owner, you may face certain situations that require you to have access to a source of instant cash. It may be the need to expand due to the increasing numbers of clients or a fire disaster that you need to recover from as fast as possible. Whatever the reason, things get more manageable if you have a source of instant cash. Bank loans usually are not helpful due to the lengthy processes involved before approval; your credit history may be unimpressive too, reducing your chances of the loan. Do not despair, a Merchant cash advance (MCA) is the solution for these problems.

In recent years, MCAs, also known as business cash advance loans have gained popularity due to their flexibility and ease of access to needy business owners.

Let us take a deeper look at how business cash advances work

What is a Merchant Cash Advance loan?

The concept behind business cash advance loans is that you can sell your business’s future sales and get the money quickly then pay it back in months. The repayment commences immediately with the cash advance lender taking a token of your current sales or debiting your bank account during business days.

This concept makes cash advance loans seem similar to a loan with providers, often stating that it is more of a future asset than a loan.

How do business cash advances work?

When your business gets approval, you get funded immediately, compared to when you apply for a loan. Loan funds come in a week or more since there are a lot of scrutiny processes while a business cash advance loan is instant.

You pay the amount through your future sales, which makes it excellent if you lack much in terms of collateral or your business credit is low.

The business cash advance might seem similar to a loan, but MCAs entail exchanging future sales for instant cash at the current time of need. The credit provider will then take the amount agreed out of your debit or daily credit sales. This continues until you have met the full payment.
You should expect the provider to put terms of repayment between 6 and 12 months, depending on the need. You should watch out for the retrieval rate (amount taken by the provider from credit and debit sales) and the factor rate(the determining factor of how much advance will cost you).

Let’s take a look at the advantages of business cash advances

  • Your assets are not used as collateral; therefore overruling the chance of personal liability of due balances in case the business goes into a dive down.
  • Payment is not set on weekly, monthly, and yearly payments; therefore, you can pay back less when business is low with no fee added.
  • Cash approval is instant with acceptance taking place in a maximum of 2 business day and funding in a week. Earlier than most sources, right? Documentation is not necessary; instead, the provider checks that your credit and debit sales coincide with what you claim to have, with the addition of bank statements to show the financial health of your business.

MCAs also have their limitations, which include:

The cost is high with an APR of 50 to 60 percent, which could increase if you pay back the loan faster since there are no perks in paying back early, except that the provider will not take out your credit and debit sales for a longer time.