When you are just starting out in business, it is inevitable that some considerable investment will be required for your profits to really take flight. Or it may happen that you simply need a short term solution for some quick capital.
A Merchant Cash Advance or (MCA) could be an alternative to consider, depending on your business. An MCA, however, is not a loan, it is defined as a cash advance that is based on the credit card sales of a business. One advantage of applying for an MCA is that the process is remarkably quick. You can have your much-needed funds deposited into your account within days, making this a very attractive option.
But before you run out to apply for this speedy solution, do consider that there are great costs for this convenience.
Take the time to analyze the following pros and cons before moving forward with a merchant cash advance. This will ensure that you are making the best decision for your business needs.
- It’s quick. As mentioned before, a merchant cash advance is a great solution when you need a fast financing option. You can get an MCA within a week and without a lot of burdensome paperwork. Merchant cash advance providers simply look at your business’s daily credit card receipts to make the determination if you are able to repay.
- You won’t lose your shirt. The great thing about MCAs is that they are unsecured and therefore, you don’t need collateral. Basically, you don’t have to give up any of your personal or business assets if your business goes south and you are unable to repay. But do know that the MCA provider may require a personal guarantee, a written document where you are held responsible for paying the advance.
- Sales down? So will your payments. If the repayment schedule is based on a fixed percentage of your sales, the repayment amount will adjust and vary, based on how your business is doing.
- Triple-digit APRs. The annual percentage rate (APR), or total annual borrowing costs, including fees and interests, can range from 40% up to 350%. This largely depends on the lender, the amount of the advance, extra fees, how long it takes to pay the advance in full, and the overall strength of the business’s credit card sales. This is a staggering amount when compared with a traditional bank loan whose APRs are typically 10% or less.
- Higher Sales Mean Higher APRs. When your repayment is based on a percentage of your total credit card sales, the APR will depend on the total fees paid plus how fast you repay the loan. If sales are bleak, the payments get spread over a longer length of time, and the APR drops. If sales are up, the MCA is paid faster, but the APR goes up.
- Your credit score may be pulled. MCA providers typically require a background credit check. However, if the provider’s inquiry also results in a hard credit check, this could hurt your credit score.
At first glance, it is easy to be drawn to the immediacy and convenience of securing a merchant cash advance when you are desperate for a considerable boost of cash for your small business. However, as outlined above, there are also many things to consider that can negatively impact your company’s cash flow.