A merchant cash advance loan is a source of short-term funding that allows a small firm to borrow money against its future earnings.
However, unlike a small business loan, which is returned monthly (or more frequently) with a defined payment amount (principal and interest installments), merchant cash advances are repaid more frequently and begin practically immediately after the funding is received, with daily or weekly payments related directly to sales.
Cash advance loans, also known as ACH loans or advances, are frequently utilized by business owners to get through financial slumps or slow periods, as well as to deal with an unexpected crisis or opportunity.
The money can be used to help stabilize cash flow over a short period of time. They’re also similar to personal monetary advances. Merchant cash advances are returned through sales rather than a paycheck like it’s done in a personal cash advance.
What Does the Repayment Schedule Look Like?
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The flexibility of merchant cash advances is well-known. In most circumstances, the financier or lender will take a fixed sum every day or a percentage of weekly or daily sales.
Repayment of a Merchant Cash Advance is a Set Amount
Fixed payback indicates that regardless of how much money is made, a fixed sum is deducted from the business’/borrower’s account. This option enables a company to determine how long it will take to repay the cash advance loan based on the amount borrowed.
If the cash advance is $5,000 plus interest and the weekly withdrawal is $500, the advance will be paid in just over ten weeks. With a fixed repayment, the borrower knows how much money will be taken out each day or week upfront.
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Repayment of a Merchant Cash Advance as a Percentage of Sales
Percentage repayments imply that a variable amount is pulled dependent on revenue for the day, week, or month. While the ultimate payment date is more difficult to forecast with this option, the business owner knows that the automated payment will be less than their income and will be limited to the pre-arranged percentage of sales.
The disadvantage of a merchant cash loan is that the company has little control over how quickly the loan is repaid. If the company has a surge of revenue, repayment is expedited. Is there a sales slump? The repayment is more gradual.
What Are the Advantages of a Merchant Cash Advance?
Is a cash advance loan a good idea? Aside from the unique repayment possibilities, there are other reasons business owners choose a merchant cash advance loan. Below are the pros of utilizing this short-term funding strategy in your business.
Cash advances are easy to get, and they can usually be paid out within 24 to 48 hours of approval. As a powerful alternative to traditional bank loans for small businesses, cash advances might potentially save your bacon if your restaurant’s refrigerator goes down in the heat of the summer.
There are no ties to collateral
Another advantage of a merchant cash advance is that there is no need for collateral. The provider is only interested in getting a slice of your future sales. Once they can guarantee that looking at your credit history, they will approve your application.
You don’t necessarily need to have a long business history
Although you may be asked to produce 4-6 months of bank statements, receivables, or daily sales records, merchant cash advances are appealing to newer firms or those with a shorter financial history.
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What Are the Disadvantages of Merchant Cash Advances?
Any funding source has advantages and disadvantages, which is why it’s critical to investigate and understand the possibilities available to your company. A merchant cash advance, while ideal for many organizations and situations, can have certain drawbacks.
Below are the cons of funding your business using merchant cash advances, be it in the United States, Australia, Canada or the United Kingdom.
It might be expensive
Cash advances have an interest rate attached to them. Due to poor sales, a high rate or a longer repayment time can result in a higher overall financing cost.
Compare a merchant cash advance or any other funding option to the other funding choices available to you before choosing one.
It is not governed by the U.S. federal government
Because advances are considered business transactions, they are exempted from certain restrictions and procedures that apply to other types of borrowing. Since it’s not considered a loan by the government, there are fewer regulations for them.
It’s still possible that your credit will be checked
While cash advances are frequently promoted to new firms with little or no credit, certain MCA providers may run credit checks before approving the advance, which may affect the interest rate. It can also have a long-term effect on your credit score. If you work with a reliable marketplace (MCA lender) that offers a single, free application that doesn’t affect your credit it will help you to explore the various types of financing options available to you.