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When you are running a small business, it may be hard to keep cash on hand every time an emergency expense pops up. One way to get extra money is through merchant cash advance financing. Merchant loans, commonly referred to as merchant cash advances, are among the most common financing tools among small businesses. 

The concept of merchant cash advance or business cash advance is that you receive an upfront sum payment in exchange for a predetermined amount of your company’s future credit and debit card sales. Instead of borrowing money with a fixed or variable interest rate, you are primarily selling a percentage of advance sales revenue. 

The conventional financing sources, like traditional commercial loans or business lines of credit, may not be ideal for every business and circumstance. If your business cannot qualify for conventional financing, these cash advances can be a perfect source of quick and reliable cash injection. 

To help you decide if these are the right choice for your business growth, you can check out various guidelines online. When you search for business financing, you may want to contact experts to help you with such tough decision making. Consider Lendzi as a great guide to help you with such a decision. 

Although merchant cash advances sound very appealing, you should take into account every minor detail relating to it. For that very reason, let’s discuss the pros and cons of these cash advances so you can conclude whether business cash advance loans are what your business needs.

Lendzi, Merchant Cash Advances, Pros
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Merchant cash advance has easy application and approval process

If you apply for a merchant cash advance, you will have access to your funds quickly. After the application submission, it may take up to 48 hours for a company to pay your merchant cash advance, and for some companies, it may take a maximum of a week. 

Still, it is much faster than getting funds from banks, which may take up to several months. When your business is in a financial emergency and needs liquid assets right away, merchant cash advances can be the best option.

Low qualification requirements

If you own a small business, know that it will be much easier to qualify for a merchant loan advance rather than a traditional business loan from a bank. Sometimes, companies will only need the record of your credit sales to get your merchant cash advance. It needs to have a turnover of $3,000 in credit card sales throughout the past six months. 

Also, companies may want to take a look at your credit history and ask for a description of what the funds are going to be used for. Overall, getting approved for a merchant cash advance is much easier and less time-consuming than in case of a bank loan.

Flexible and scalable finances for your business operations

With high market volatility, it is hard to predict whether your monthly income will rise or decrease in its value. So, if you have a bank loan with a fixed or variable annual percentage rate, you may not be able to repay monthly bills due to decreasing sales. With these cash advances, usually, repayments are made as a percentage of the company’s revenue. That being said, the repayment goes up when you have more income, and down if the period was not going through a lean period. This is a favorable term for any small business because, unlike fixed payment finances that banks provide, you can be more assured your business will be able to make payments even if it faces financial difficulties. 

Another advantage of merchant cash advance is that you may effectively open a new line of credit alongside having your merchant loan. This proves how flexible and efficient having merchant cash advances are. And it also works vice versa, meaning if you have a current equipment lease agreement, it is possible to get approved for a merchant cash advance and finance more general activities.

Lendzi, Merchant Cash Advances, Cons
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Merchant cash advances have higher costs compared to traditional loans

Although these cash advances offer many advantages, there come several disadvantages as well, including higher fees. The merchant cash may charge the equivalent of a 60 to 200% annual percentage rate on your advance. 

Many business people fail to calculate their future cash flows with this type of financing, ending with shortages in their funds. So, to avoid higher fees and interest rates, make a proper calculation, and ask a company to list the contract’s effective rate. 

If you are paying 6% of your monthly credit card sales in exchange for a merchant cash advance, the annual fee is not 6% but much higher. To clarify how much exactly it is, ask for the company or look for it in the contract.

No credit-building benefit because lenders will not report to credit bureaus 

There is no federal oversight in the merchant cash advance industry and is not subject to national regulations. The reason behind that is that merchant cash advances are classified as commercial transactions, not loans, and cannot be subject to any federal regulation. 

Instead, they are regulated by the Uniform Commercial Code separately in each state. Unlike banks with general laws such as the Truth in Lending Act, the cash advances will rely on less documentation and fasten the process.

By not being subject to federal regulations, companies providing merchant cash advances will not inform them about your credit ranking. So, if you are thinking of building a credit score, these are not the right option.

Wrapping up

All in all, despite all the advantages and disadvantages merchant cash advances, may have, every business has different needs and financial planning. For many companies, these may cause serious problems; for others, it may be an excellent tool for a quick and easy cash injection. 

In any case, make sure you use the money wisely to grow the business. But always keep in mind that when you search for proper business financing, it will require more time and effort to put you on the right track.


About MARK B

I have nothing but good things to say about CashOne's team. They have helped me in such critical situations when I felt suffocated.

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