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The Pros and Cons of Merchant Cash Advances

  • Financing|
Published: 04/18/2018

Merchant cash advances are a great alternative to traditional types of financing for businesses. If you’re in need of cash fast, a merchant advance might be the best option for you. Take a look at the pros and cons of merchant cash advances below to help you decide if it will be the best financing option for your business.

What is a Merchant Cash Advance?

If you’re not already familiar with a merchant cash advance, it’s a quick and easy financing option that helps you get a cash advance without putting up collateral. Generally, the maximum advance amount will range from $2,500 to $250,000, but the average factor fees are between 1.14 and 1.18. You can typically get the funding you need within a week, and payments are automatically deducted each day through your merchant account, making it easy to manage.

What are the Pros?

Merchant cash advances offer businesses a lot of pros. Here are some of the main benefits of choosing a merchant cash advance:

● Qualifying is easier than with other types of loans. Getting qualified for a business loan can be difficult. Factors like debt ratio and credit score can make it really difficult to get a good rate or even to qualify at all. Merchant cash advances are much easier to qualify for than other loans, and many businesses can qualify.

● The application process is easy. To apply for a merchant cash advance, basically all you have to do is fill out a simple application and submit it with a government ID and some financial statements. No forecasts, no business plans –it’s fast and easy.

● It enables you to get cash fast. Traditional business loans can take a while to process, and that’s after you already spent time filling out the applications and gathering the necessary paperwork. Merchant cash advances can get you money fast, in as little as a few days to a week, so you can keep things running smoothly.

● You don’t have to have good credit. As mentioned, you don’t have to have good credit to qualify for a merchant cash advance. That means even if you might not qualify for other types of loans, you can still get the financing you need to keep your business moving forward.

● There is no fixed monthly payment. Because repayment is based on monthly sales, if you have a slow month, you don’t have to worry about paying a fixed monthly fee. You have a little bit of flexibility for those months that aren’t as profitable as others and can make sure you aren’t having to rob Peter to pay Paul, making repayments you don’t have the cash flow to pay.

● You don’t have to put up collateral. A lot of traditional business loans require collateral, but merchant cash advances don’t. You can keep your assets safe and still get the cash you need to cover costs you might not have expected or may not be able to cover right away.

● Repayment is automatic. Because repayment is automatically deducted from your merchant account, you don’t have to worry about any late fees or forgetting to make a payment here and there.

● There’s no interest. Merchant cash advances to involve a factor fee which is generally between 1.14 and 1.18, but there’s no interest rate, which means the money you pay back goes directly towards the cash advance, not towards interest.

● There may not be a legal liability to repay the merchant cash advance in full. Unlike with other loans, which hold you responsible for the full amount, you may not have to repay the full merchant cash advance back in the unfortunate event your business was to go under.

What are the Cons?

Although merchant cash advances have a lot of benefits, they aren’t without their downfalls. Here are some of the biggest cons of a merchant cash advance:

● Fees are higher than other traditional loans. Although there is no interest rate, the factor fees can add up quickly since payments are being deducted daily. You will end up paying back more money for a merchant cash advance than with another loan.

● You can’t easily change merchant service providers. Most merchant service providers will include a section in the agreement that says you cannot switch to another one. That means if you’re having issues with their services, you’ll have to stick it out.

● A merchant cash advance is not a long-term solution. If you’re in need of a long-term solution to cash issues, a merchant cash advance may not be the best option for you. Although it’s great to help businesses get the cash they need quickly, it’s not the best option for a long-term loan.

Final Thoughts

Merchant cash advances offer businesses a lot of benefits and can help you get the cash you need quickly. Since the requirements aren’t as strict as with other types of loans, it’s easier for businesses in all types of situations to qualify—making it a good option for everyone, even if they have poor credit. It’s important to always carefully consider other options before making a final decision, but a merchant cash advance might just be the perfect financing option for you.

What are your thoughts on merchant cash advances? Would you get one for your business?

If you have any questions about merchant cash advances, you can contact us here.

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