Your company’s capability to provide funds in case of unanticipated costs and investment opportunities is very important. Growing your business means you have to have funds in order to sustain and improve its operation. For example, if your business will suddenly boom, you may need to purchase new equipment, buy new products, open new branches, hire new employees, promote your business through advertisements, and consider other expenses to be covered. In situations like this, merchant cash advance firms are here to help you.
Advantages and Disadvantages
Like any other finance provider, having merchant cash advance providers to help you with your business have advantages and disadvantages. To guide you through, you may consider the following discussion.
Advantages
Here are the advantages of having a merchant cash advance provider as your partner in growing your business. This is best considered when sudden opportunity arrives or if you need the cash immediately.
1. Quick Setup
If, suddenly, you need a fund for a sudden opportunity or if you are in serious need of cash, merchant cash funding is very useful because they can be obtained immediately. The processing can be done in less than a week.
2. Easy to Get
The approval rate of a merchant cash provider is very high. With a merchant cash advance company, you are not required to submit many documents. During online application, you only have to submit a government identification card and your business bank statements for a few months.
3. Perfect Credit Is Not Needed
Unlike other lending institutions who assess your credit history as part of their review procedure, engaging with merchant cash advance business does not require a good credit history or a perfect credit. This type of scheme will help those with bad credits to improve their rating.
4. No Upfront Collateral
When applying for a cash advance in a merchant cash advance provider, you do not need to present any form of collateral.
There are many benefits that cash advance can provide if you use them correctly, so it is best to consider this if you are confident that your revenue is high enough to repay the amount due in an agreed schedule with a sufficient amount to be left for your capital.
Disadvantages
1. Expensive
The percentage rate of top merchant cash advance loan providers is technically high. This is because the factor rate to be applied multiplied to the cash that was advanced is the fix amount that you are going to pay in full. And this amount is divided equally into the whole payment period. Contrary to the commercial bank wherein, as the principal is being paid and the balanced is reduced, the interest being paid is lesser.
2. For Short-term Solution Only
A merchant cash advance is usually availed by clients that do not qualify in a bank loan or by business owners who suddenly needed a fund for immediate use. With this, you need to assess the condition of your business before applying. You should examine first if your business can provide enough income to repay the fund provided and the interest in a very short period of time.
3. Not a Solution to Your Problem
Getting a merchant cash advance loan provider to grow your business is not a solution to your problem if you use it incorrectly. After the approval of your application, you will be infused with cash to be repaid on a regular, usually daily, installment. However, the moment you start to repay, the availability of your fund will reduce. And it is considered the critical part. Hence, you have to assess if your income can repay the cash advance without hassling your capital.
4. Risky financing future sales
Merchant cash advance is not a loan. You are actually selling your future sales, but the risky part is that if your sales will drop. Considering the fact that you are to repay based on the percentage of your income, you will be left with very small funds to be used as capital if that will happen.
Types of Businesses
In merchant cash advance industry, it is very common for small businesses to help them improve their income. The process of applying is so easy, and the amount of cash advance will be deposited quickly into ones account the moment the application is approved. For them to be qualified, they must have to meet certain required revenue, and for the merchant cash advance provider to evaluate the payment capability of the client, he (the client) may be required to be in business for a certain period of time, which is dependent on the requirement of the provider.
If you opt to seek merchant cash advance provider to help you grow your business, they will find cash for whatever type of industry you have. Listed below is the selection of industries that could be benefitted by merchant cash advance.
- Online Stores
- Brick & Mortar Retailers
- Restaurants/Food Services
- Hotel / Motel Proprietors
- Franchise Operators
- Auto-Parts & Repair Shops
- Beauty Salons
- Retail Businesses
- Healthcare Operations
- Grocery& Liquor Stores.
The good thing with the merchant cash advance provider is that you are still qualified even if you do not have collateral and even if you have bad credit history.
Precaution to Business Owners
As a business owner, it is very relaxing if you know that you have an additional capital to grow your business. Especially, if in times of immediate needs, a cash advance provider is there to provide you with your needed capital. But before considering applying in a merchant cash advance provider, there are some precautions that you should ponder.
1. High Annual Percentage Rate (APR)
The APR of merchant cash advance, which is the total cash advanced amount including its interest and other charges, is relatively higher when compared with traditional bank loans.
2. Higher Sales Mean Higher APR
Your repayment in merchant cash advance will depend on your sales. However, it was observed that if you have lesser sales, your annual percentage rate is lower because your payment will be spread throughout a longer period of time. And if you have higher sales, you will repay in a shorter period of time, which means that your annual percentage rate will go up.
3. No Benefit When Repaying Early
Upon agreement of the contract, a factor rate will be applied to your cash advance. The product will be the fix amount that you will repay. So even if you are going to pay in advance or pay the full amount early, you are still going to pay the same amount, which is the cash advanced amount multiplied by the factor rate agreed.
4. No Federal Oversight
Merchant cash advance providers do not follow the Truth in Lending Act because they claim that they are not providing a loan. Instead, they are being regulated by the Uniform Commercial Code in every state.
5. Credit Score May Be Pulled
The merchant cash advance providers will help those who have bad credit, but before they give you the cash advance, they are going to check your credit score. And if they found out that you have hard credit check, your credit score can be hurt.
6. Debt-Cycle Danger
A client’s debt may inflate because if they find it hard to repay the amount advanced from their provider, they will look for another institution who can lend them money to pay the previous one. Then, if the same situation will happen, they are going to seek again for another provider, which in turn will make their debt grow.
7. Confusing Contracts
The contracts that you are going to agree with the merchant cash advance providers contain unfamiliar words that are hard to understand. This is because they have different terms with traditional bank loans.
Other Alternatives to Merchant Cash Advance
Some business owners are using merchant cash advance as their only option simply because they are not aware of other alternatives. When in fact, there are more appropriate and practical opportunities for them to get the funds they needed to maintain or grow their businesses. To give an idea, here are these alternatives.
1. Short Term Working Capital Loans
This alternative is actually the same with merchant cash advance in terms of interest rates and payback periods. Their main difference is the means of payment. While the merchant cash advance will deduct a percentage of your daily credit sales directly from your account, the payback with Working Capital Loans will be through a daily Automated Clearing House (AHC) with a fixed amount.
2. Collateralized Loans
There are some small businesses that would use home equity loan to get funds for their needs. However, using this alternative may be riskier. There is a big possibility that the borrower may lose his home if he will not be able to pay.
In this option, you may use your own real estate or your equipment as collateral to access funds and may pay it back in a certain period of time, usually 2–4 months.
3. Credit Cards
Using a credit card to take a cash advance is very much cheaper than using a merchant cash advance. The credit card charges may range from 3% to 5% upfront and around 25% annual percentage rate. Though, most available credit limit cannot fully fund the needs of your business.
4. Invoice Factoring
This sort of alternative is not the best option because it has actually high annual interest rate of 60% or greater.
5. Small Business Term Loans
The main difference between Term Loans and merchant cash advance is the payback period. Term Loan will range from 2 to 10 years, which is longer as compared to merchant cash advance with a payback period of up to 2 years only.
With these presented facts, it is now up to you as business owners to choose the best cash advance provider that you believe have the ability to help you make your business successful. Reviews of merchant cash advance loan providers can be used as a resource in finding the right provider for your financial needs. Thus, make a habit to keep informed through effective reading.
Afraid of losing your business? Apply now for a fast reliable funding with Merchant Cash Advance Companies listed at CrowdReviews.com.
Trevor Price
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