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Weighing the Pros and Cons of a Merchant Cash Advance

When a small startup has cash flow problems, it can be difficult financing. A lack of business history, collateral, and nonexistent business credit make it difficult for small businesses to get traditional loans.

If a business is looking for a short-term financing fix to buy more inventory before a busy season, unroll a new product, or pay for an emergency equipment, it should consider a merchant cash advance. Advances offer quick access to funds, a simple approval process, and it doesn’t require collateral. A merchant cash advance is paid back with the business’ cash flow, so there is no need for collateral.

Good Candidates for Merchant Cash Advances

Merchant cash advances are good choices for newer, less-established businesses that have no collateral. Small businesses often have few problems qualifying for advances because eligibility standards aren’t as strict as those for other types of financing. Those with no credit or poor credit and limited business history often still can get approved.

Also, if your business makes most of its money through credit card payments, such as an online retail store, then you should consider a merchant cash advance as a short-term financing tool. Advances work differently from traditional loans. When you get a merchant cash advance, you pay the lender back with a percentage of your daily credit card sales instead of regular, agreed-upon monthly payment.

If your business has a cyclical revenue stream, this is also a good type of financing for you. If you know that certain holidays are when you bring in the most revenue, you can you use an advance to get you through your slow seasons.

How Funding is Determined

In general, the amount of your advance is based on an average month of your credit card sales. To qualify, your business will need a steady revenue history of about $10,000. Most advances range between $50,000 and $70,000.

Downsides to Merchant Cash Advances

This type of quick funding and simple application process comes at a cost. Lenders charge higher fees on merchant cash advances than traditional loans. To know how much you will pay in fees, the lender determines a factor rate. Rates range between 1.2 and 1.5 based on the lender’s risk assessment of your business. Higher fees come with higher factor rates. To figure out your total merchant cash advance repayment amount, multiply the cash advance by the factor rate. For example, if you receive an advance of $60,000 with a factor of 1.5, your total repayment amount would be $90,000. With this example, you would being paying $30,000 in fees.

Another thing to consider is that a typical term for a merchant cash advance is 12 to 24 months. The higher your monthly credit card sales, the quicker you pay it off. With such a short term, your business will feel the pinch of a reduction in cash flow as daily or weekly deductions are taken to repay the advance.

Merchant Cash Advance Process

To apply for an advance, you will need to provide a lender with a few months of credit card statements, your credit score, and some other business documents. Though a lender wants to know your credit score, many businesses qualify with minimum credit scores of 500, which credit reporting bureaus consider a poor score. In many cases, merchant cash advance is approved in a day or two.

In Conclusion

If you need a short-term funding to cover an unexpected expense, buy more inventory, or get through your slower season, then a merchant cash advance is good option for your business. Before you apply, make sure you understand your business needs and the terms that will work best for you.

The merchant account advance process is simple and quick, making it a great option for smaller startups.

If you are a small business that needs money fast, then apply for a merchant cash advance from First American Merchant (FAM), which offers financing solutions to all types of businesses. It offers an easy online application and businesses often get approved quickly.