With multiple avenues of funding available for businesses in need of capital, selecting the most beneficial method can sometimes prove difficult. Although business loans are a commonly discussed option, not all merchants qualify for such funding, and some would rather look into alternative choices, anyway.You may have heard about merchant cash advances before, as many business owners turn to such options when in need of fast funding. There are several significant benefits to obtaining a merchant cash advance, but there are also several drawbacks. Knowing these pros and cons will make your decision easier and give you a better understanding of whether this type of financing is the right fit.
Flexible Qualification Requirements
Cash advances for merchants typically have high approval ratings, due to their more flexible qualification requirements. Although the information requested is similar to that required for securing a standard business loan—such as the number of years you’ve been in business, recent credit card processing statements and tax returns and bank statements—certain data isn't as scrutinized when seeking a merchant cash advance.
For example, you may be asked to share your company’s credit report, but it does not play a major role in the application process. In fact, many who apply for a merchant cash advance opt for this form of business funding because they don’t have to worry about their credit scores hurting their chances of being approved.
Credit Not In Jeopardy
A merchant cash advance is not a loan, but rather, a transaction between the business owner and provider, whereas, the latter pays the former upfront in exchange for a percentage of the company’s future credit card sales. You aren’t expected to pay a certain amount of money each month to your provider as if you'd taken out a business loan—the number will fluctuate based upon the volume of credit card transactions for that particular month. As a result, there aren’t any potential missed payments that could negatively impact your credit score.
Faster Access To Capital
The quicker you receive the sought-after capital, the better. This way, you won’t have to wait too long to invest that money back into the organization and expand and improve it. Since cash advances for merchants involve a simple application process, providers respond almost immediately. In fact, some applicants hear back within 48 hours, and obtain funds in the following week or two.
Some forms of business lending restrict merchants' spending choices and/or require breakdowns of what exactly they plan to use the money for during the application process. This isn't required with a cash advance, which means you can purchase more efficient equipment, guarantee payroll, or pay off any outstanding looming debts, without owing your provider an explanation.
No Set Repayment Deadline
As aforementioned, a cash advance does not involve a merchant making monthly payments to a lender, and since your business' card purchase profit varies, you’re not obligated to pay your cash advance provider exactly the same dollar amount each month—just the same percentage.
Consequently, your provider is not going to set a strict date you must pay off your debt by. This alleviates repayment deadline pressures—oftentimes, an otherwise hefty and stressful burden. It is important to note, however, that this is generally a short-term form of business funding, so you will likely repay what you owe within about a year—but we'll get to that next!
Likely Not The Best Long-Term Solution
While merchant cash advances do hold several significant advantages, they may not necessarily be the best financing option for every business. Companies requiring long-term financial assistance, for example, may not be the most ideal candidates, while those seeking short-term financial solutions may be perfect. This is primarily due to merchant cash advances typically including repayment terms that vary anywhere from a few months to a year or so.
Only Optimal For Businesses That Process High Volumes Of Card Payments
If your sales primarily concern cash payments, securing a merchant cash advance is likely not the most beneficial decision. Rather, it’s most advantageous for those that process a high volume of credit and debit card payments. Otherwise, repaying a provider would take a significantly longer time.
Interested in applying for this type of business funding? Learn about the key qualities a merchant cash advance provider should have.