A merchant cash advance is a lump sum payment that is made to a business in exchange for a percentage of future credit card sales.
Business owners benefit from merchant cash advances because they gain quick access to cash. Merchant cash advance providers, on the other hand, purchase of the company's credit card receivables and earn a healthy return for their efforts.
Are merchant cash advances appropriate for every situation and every small business? No, but in some circumstances a merchant cash advance provides the cash flow that is necessary to keep the business afloat. Here's everything you need to know if you think a merchant cash advance might be right for your business.
How do merchant cash advances work?
Merchant cash advances are a way to fund current expenses through future income. Although in theory, any business that accepts credit cards can take advantage of merchant cash advances, they are commonly used by retail, restaurant, and service companies with high credit card volume.
In essence, merchant cash advances are loans for businesses that find it difficult to access traditional financing vehicles. The merchant gets cash now in exchange for a percentage of future credit card sales until the advance and the premium have been repaid, which usually happens in less than twelve months.
However, merchant cash advance companies are quick to point out that they are not lenders because they are purchasing receivables and don't require a fixed repayment schedule. By avoiding the lender label, merchant cash advance companies are exempt from laws that restrict interest rates – allowing them to charge effective annual percentage rates of 60% or more.
What are the benefits of merchant cash advances for business owners?
For owners, the most important benefit of a merchant cash advance is quick access to cash. If no other forms of financing are available, a merchant cash advance can immediately convert receivables into cash in hand. Some companies would be unable to continue operations without them.
What are the costs for getting a merchant cash advance?
Merchant cash advances carry a heavy price. With exorbitant premiums, a merchant cash advance can easily reduce a dollar's worth of receivables to fifty cents. Businesses also run the risk of becoming overly dependent on merchant cash advances instead of addressing the core issues at the heart of their cash flow problems.