There comes a time in the life of most small business owners when the company has some short-term cash flow problems, needs additional supplies or equipment, or even needs funds to pay existing payroll taxes. It happens. Current customer can be slow in paying their invoices. If customers do not pay the business on time, the business cannot pay its bills in a timely manner. Then there are the months where business is traditionally slow. You know that sales will pick up in 30 or 60 days but what do you use for cash in the meantime? Do you apply for a payday loan or a merchant cash advance?
Some small business owners will consider a personal payday loan to bridge the gap. This is one of the most expensive moves you can make for your company. First of all, the payments are going to come out of your personal checking account. If business is slow, how do you know the money will be there when the lender ACH’s your checking account? But there are more issues here.
Many states have outlawed payday loans because they are considered predatory lenders. The APR when calculated on an annual basis is over 500 percent! This is just not a good business practice. Desperate times can make us take desperate actions. But it is totally unnecessary. It seems like an easy solution. Just apply on line and the money is in your checking account the next day. However, you will be paying for this service – and you will continue to pay.
Small businesses that accept credit and debit cards have a good, less expensive alternative solution – a merchant cash advance. A merchant cash advance is ready cash in your account based on your future credit card and debit card sales. There is no fixed payment. This means, unlike a pay day loan, you will not have an absurd amount taken from your personal checking account every two weeks.
For simplicity sake, let’s say you need $10,000. Your yearly credit card sales are $60,000 but each month varies greatly. One month you could process $2,000 and in November you could process $10,000. Your payment is based on a fixed percent of your sales – we will use 10% because it is easy to figure. With a merchant cash advance you will pay $200 in the month where you process $2,000 and $1,000 in the month where you process $10,000. With a payday loan, you would have had to pay around $12,500 within a two week period. In essence, a merchant cash advance turns a very scary situation into one where there is help and breathing room.
With a merchant cash advance your credit rating does not come into play. The lender makes a determination based on the whole picture, with the largest factor being your actual sales. If you are behind on some payments, you should not worry. This is your opportunity to bring everything up to date.
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