Businesses that rely on sales for revenue — such as restaurants, bars, retail stores and salons — may have a hard time qualifying for traditional bank loans. That certainly doesn’t mean they’re out of luck when it comes to securing funds, and one alternative financing option to consider is a merchant cash advance.
Merchant Cash Advance ABCs
What is a merchant cash advance? Let’s start by saying what it is not: a business loan. Instead, a provider advances a lump sum that’s repaid via a percentage of daily credit and debit card sales — plus a fee. Typically, that means payments are made on a daily or weekly basis, directly from the business’ payment processor, i.e., merchant account.
Merchant cash advances may also be used by businesses that don’t rely heavily on debit or credit card sales, but in those cases, payments are taken directly from the business’ bank account.
Merchant Cash Advance Plusses
While merchant cash advances are often considered a financing option of last resort, business owners may choose them over other lending options for a few reasons:
- They can often be approved within a week, because instead of tons of paperwork, providers will review daily credit card receipts to determine eligibility.
- Easy qualification. They are usually easy to qualify for — even for startups or owners who have bad credit.
- No physical collateral. They are unsecured, so no business assets must be supplied to back up the financing — but a personal guarantee is often required.
- Sales-payment link. When sales are down, payments may be, too.
Merchant Cash Advance Issues
Like any financing option, due diligence is required before deciding to move forward, and for merchant cash advances, there are things to be wary of:
- High APR. The annual percentage rate — total cost of borrowing, which includes fees and interest — typically ranges from 40% to 350%.
- Sales-payment link. If sales are high, it will be repaid faster, and the APR goes up.
- No benefit to repay early. The fees are a fixed amount, so there are no interest savings from early repayment.
- No federal oversight. Because they are structured as commercial transactions rather than loans, they’re regulated by the Uniform Commercial Code of each state.
- Credit score ding. A background credit check is a common requirement for one, and if a provider’s inquiry results in a hard credit check, the business owners’ credit score could be hurt.
- Confusing contracts. They have costs and repayment structures that can be difficult to understand, and because APRs are not provided, it’s impossible to compare them to other financing products.
Merchant cash advances are not for every business; it’s up to each business owner to determine whether the fast funding and flexible qualifications outweigh the costs. If you’re interested in talking pros and cons — and other options you might not be aware of — give Clear Skies Capital a call at 800-230-9822.