Cash flow is perhaps one of the most significant factors pertaining to your business’s financial health and you need to pay close attention to it at all times. You need cash to pay off your vendors or suppliers, maintain inventory and manage your business growth in an effective manner.
Cash flow becomes even more important in times of economic recession or volatility. A business that needs to raise cash instantly will have a few options to choose from with merchant cash advance being one of the most prominent in the list. It has been used by many companies previously to get out of financial tight spots and is gaining in popularity all the time amongst small business owners.
How does it work?
To be clear, cash advances for business should not be confused with a conventional loan. It is essentially an advance granted to your business against its future income. The lender will provide you with a lump sum amount upfront and this amount will be paid off automatically through a pre-agreed percentage of your daily debit card and/or credit card transactions.
The percentage amount that you pay back is called the retrieval rate or ‘holdback’ and it can range from 5% to 20%, depending on the size of the amount advanced to your business, your credit card sale history and the period of repayment. Based on the amount advanced to you, repayment terms can in some instances be as short as three months or as long as eighteen months. Repayment on the cash advance begins as soon as you have received the funds from the lender.
So how much of an advance amount are you entitled to receive from your lender? This is figured out by determining your company’s average credit card and debit card transactions over a period of 3 to 6 months. The advance amount provided to you by the lender can range from 50%-250% of your company’s average credit card and debit card transactions.
Advantages of Merchant Cash Advance
As stated previously business cash advance is becoming increasingly popular as a funding option because of the number of benefits it provides including:
No Need for Collateral or Credit – This funding option has minimal impact on your business’s credit ratings. While small business loans can severely affect your credit score, a business cash advance is secured against the future sales generated by your business. This is precisely why you will struggle to find any mention of merchant cash advance in a credit report. You don’t stand the risk of losing valuable collateral, again, because the advance is predicated on the future credit card and debit card receipts of your business.
Fast Collections and Applications – Getting access to the required funding is relatively straightforward and fast compared to many other conventional funding products. Your lender will take a look at your financial statements, tax returns and business plans while evaluating your suitability for the cash advance. Lenders usually pay close attention to two important factors: the amount of time your business has remained operational and your average monthly transaction history through credit cards. If you have significant credit card and debit card sales, then being approved for a merchant cash advance is a mere matter of formality.
Fast Cash Access – Compared to most other loan options, you don’t need to hand in a lot of paperwork along with your cash advance application. While it can take many months for a small business loan to be approved by a conventional high street bank, you could receive your cash advance in as little as seven days, once your application is approved. This can come in particularly handy if you are in need of quick funding.
High Approval Rate – MCA has much higher approval rates than traditional bank loans. In reality, cash advance requests are rarely rejected, as negotiations typically begin when certain issues arise.
Collections Based on Revenue – If you secure a traditional bank loan, you might face a lot of problems making loan repayments if your sales targets are not met. This is not an issue with business cash advance, as the lender only gets paid when your company completes sales.
While conventional bank loans are still the best funding option for small business owners, strict lending criteria and long approval processes means that more often than not this not the ideal option for a business owner seeking a quick influx of cash. A merchant cash advance on the other hand can be secured without attaching a significant collateral and within a relatively short period of time.