Every business requires funds to operate and grow and those funds are frequently acquired using a traditional bank loan or a line of credit. But many small businesses also use merchant cash advances as a quick source of funds.
Small Business Loans Compared to Merchant Cash Advances
Traditional term loans involve a lender who will provide a set amount of funds upfront with repayment due at an established future date, along with interest. The loan is typically paid off with a small portion of the loan sum due in monthly payments.
Merchant cash advances involve a lender who will loan a specified amount of funds upfront as an advance against future credit card sales. The lender draws funds as a percentage of credit cards sales as repayment (with interest) and payment draws are made daily or weekly. Because credit card sales vary, payments on cash advances will also vary.
Advantages of Merchant Cash Advances
Merchant cash advances offer the key benefit of speed. Funds can often be received in three days due to fast application, rapid processing, and quick funding. There are also more lenient qualifications compared to traditional loans. The key focus is on a company’s credit card processing statements. Payback of the funds received is flexible based on the volume of credit card sales. So, in a period of slow card sales, loan payments will also be smaller. Merchant cash advances offer high borrowing limits so there can be sizeable spending power. Funds can be used for any purpose and there is no collateral required beyond the credit card sales.
Merchant Cash Advances Downsides
There are some downsides to merchant cash advances. Specifically, they don’t always contribute to building a company’s credit score, there are no prepayment incentives, budgeting may be more difficult due to varying payment amounts, and there is the potential for high finance charges.
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