Business

A merchant cash advance: is this the best option for my business?

For any business to grow, it will likely need strong cashflow. This can help you invest in hiring new talent and improving your products and services. But boosting your cashflow can be a difficult task. A traditional loan might be hard to obtain, and it can be tricky attracting investment during uncertain financial periods. One option, though, is a merchant cash advance. But is this the best option for your business? Read on to find out. 

What is a business cash advance?

A business cash advance is essentially a way for your business to sell its future transactions to a lender. In return, you’ll receive a loan up front with interest rates. This process starts with a lender looking at your credit card receipts. From there, the lender will enquire about how much cash you need up front and your ability to pay this back. This equation will then set the terms of the loan you receive. It can be used to give your business an instant cash infusion to fund machinery repairs, a management buyout or any other investment to help you navigate a difficult time. 

How does a business cash advance work?

A business cash advance isn’t as rigorous as a normal loan, due to the lender being aware of your credit receipt history. However, there are still stipulations in this contract that you’ll need to adhere to. For a start, you’ll need to think carefully about the amount of money advanced to you. The more you ask for, the stricter the terms of the loan may be. You’ll need to think carefully about this as you’ll be paying back your daily sales during this period. Indeed, the interest you pay back will mean that you almost certainly pay more in return than you took out. By carefully analysing the terms of this loan, you can calculate whether it will help your business. 

Pros

One of the main benefits of a merchant cash advance is that you’ll quickly get the financial injection you need to support your business. If you need the cash quickly, this is one of the best ways of securing the capital needed for your project.

What’s more, unlike a traditional loan, you don’t need to place down collateral to secure this financial package. Furthermore, your credit score is unlikely to be taken into consideration. Instead, the decision of the lender will mainly be focused on your sales receipts and what they can expect to earn from these transactions. 

These loans are often more flexible than traditional deals too. If you’re going through a period of surprisingly low sales, it’s common to restructure the deal with the lender to ensure the stability of your business. 

Cons

There are some drawbacks though. For a start, the extra cost of paying back the loan can eat into your profits. If you’ve factored profits into your financial plan, this type of loan can prevent your company from growing and lead to a period of stagnation. On top of this, if you do restructure your deal due to low sales, you could find yourself paying high interest on the loan.

Another issue is that these types of loans aren’t regulated. This means that if you aren’t careful your interest could rise higher than normal bank loans, leading you to get a poor loan product and growth problems for your business.

In the right circumstances, a merchant cash advance can be an excellent option for your business to enjoy a cash infusion. If you’re recording strong, consistent sales, but require a short-term cash injection to take your business to the next level, this could be the perfect financial product for you. Just ensure that you use the guide above to plan carefully and get the best deal for your business. 

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