Business Cash Advance

Written by: Mary Branca

Retailers, service providers and e-Commerce companies that accept credit card payments and need a quick influx of cash for whatever reason can opt for a Merchant Cash Advance. This type of transaction is not only a fast way to infuse capital but it may be the only option for those with limited or negative credit scores.

The basis for a merchant cash advance

A Merchant Cash Advance is not a traditional loan. Rather than borrowing a certain amount of money and making equal monthly installments, the customer is "borrowing" against future sales and credit card receipts. Merchant Cash Advance lenders tie all payments to the ebb and flow of monthly sales.

Unlike Small Business Loans, Merchant Cash Advance lenders are not regulated by the Federal Government. They are self-regulated and self-regulation can be more stringent than governmental laws. Because lenders are in business to make money, there is no discrimination at all as long as the borrower meets the minimum requirements. The association tries to weed out and restrict any rogue lenders.

Each lender will have its own set of requirements. Industry standards are generally that the business has been open for at least six months and processes at least $4,000 a month in credit card sales. Each lender sets its own percentage of sales for payback. In the industry the highest payback is 9%; however, lenders do take into account a business' profit margin before setting this rate

Benefits of a merchant cash advance

• The borrower does not have to provide personal collateral
• The business does not have to worry about writing checks for monthly payments
• If the agreed upon rate is 9%, then the "payment" in the slower months is still 9% and not a fixed installment that may be a burden on the company
• It is much quicker than conventional small business loans
• There are no loan fees
• There is much less paperwork involved
• A high credit score is not required
• Many lenders have private, secure on-line application processes

The downside of a merchant cash advance

The largest downside is the Annual Percentage Rate. The APR on a Merchant Cash Advance can go up to 30% or more. When compared with the APR on a small business loan, it can be up to three times more expensive. The Merchant Cash Advance will be written to be repaid within a 12 month period, sometimes sooner. The conventional loan will have a longer pay-off, often up to 36 months.

Know your lender

Merchants considering a Merchant Cash Advance can protect their own interests by comparing offers. Each lender will have a percentage to be paid each month. Understand the terms of the agreement completely before signing. While the merchant needing quick cash may not have other options ask the Cash Advance lender for the APR on your loan. This will be another way to compare offers. While the industry is growing, it is certainly competitive. Anyone searching for the best Merchant Cash Advance should perform their own due diligence.