Merchant cash advance providers essentially inject cash into your SMB in exchange for an agreed-upon percentage of your sales. These are sales paid for using a credit card. It’s why the provider requires you to use a credit card processor from their recommendation list.
Still, as advantageous as a merchant cash advance is, should you take one for your business? Is it the right source of quick capital when you need money, or should you apply for a loan?
Truthfully, a merchant cash advance has both advantages and disadvantages that you must weigh before applying. These will help you evaluate whether the risk is worth it or it’s better to seek another source of funding.
Advantages of a Merchant Cash Advance
1. Fast Processing Rate
Depending on your credit card sales volume, you can receive a large sum of money fast to inject into your business. The only requirements are you send in your application plus all the documents the provider requires. After meeting the criteria, the cash advance takes little time to process, and you can proceed with your plans.
2. Apply even with Poor Credit Score
Provided your business meets the business sales volume set by the advance provider, you can apply even with poor credit scores. It differs in this way from a loan that requires you have a higher credit score to qualify. Even with a poor score, the cash advance merchant gives you the money provided you meet all the requirements.
3. No Monthly Payments
Cash advances work by signing over a specific volume of your credit card sales to the provider. It’s different from loans because you won’t need to pay monthly installments.
4. No Restrictions on the Money
Once the advance hits your account, you have the liberty to use it however you want. The merchant cash advance providers don’t follow up to check if the money was for business or personal use.
The bottom line is you meet your end of the deal and provide credit card sales in the future. Spending restrictions aren’t an issue here.
5. Doesn’t Affect Your Credit Rating
The good news is getting a merchant cash advance does little to affect your credit rating since this isn’t a loan. Loans consider your credit score and can diminish your rating due to late or non-existent payments.
Also, you won’t need to provide your assets as collateral to get the money. All that the provider needs are clear records of your past business sales.
Disadvantages of Merchant Cash Advance
1. Early Repayment Makes No Difference
The contract states that you have to pay the provider a certain fraction of your future credit card sales profit. For this reason, paying off the advance earlier comes with no benefits like interest savings. So it’s better to take your time rather than rush to finish the amount.
2. Checking Credit Score
Though most merchant cash advance providers don’t necessarily use the credit score to determine if you can get the advance, they can still do checks. It means if you have a low score, it can get even worse when the provider requests your scores.
3. Extra Cost Seeking Counsel
Once the cash advance provider is satisfied with your application, they provide you with a contract to sign. For many SMB owners, this contract can be confusing since it’s full of terminology. Such wording means you need to seek help from an expert to understand what the contract states. Hiring the expert comes at a cost.
4. Cycle of Debt
Yes, merchant cash advances are easy to access, which is a good and bad thing. It’s a disadvantage because it quickly plunges you into a cycle of debt. You soon find yourself needing more advances because of the high cost affecting your business’s cash flow.
5. Lack of Federal Regulation
Legally, merchant cash advance providers operate outside the federal regulations that oversee loans and credit cards. It’s easy to find yourself in hot soup without an overseeing body as a protector against bad deals. That’s why you should take time to understand the contract and whether the advance is best for your SMB.
While merchant cash advances have numerous advantages for your SMB, also keep the disadvantages in mind. That way, you can decipher if this is the right solution for your cash flow problem or not.