If you are a business owner and wonder what exactly a merchant cash advance is or how it will help you when you may need one, then this article will help explain what it is and break down a few pros and cons of receiving one for your business.
Basically, owning a business is all about gaining the financial capital to run your business. You need the money flow to produce the merchandise in order to keep your head above the water and customers coming back.
Usually, a merchant cash advance is taken out by a business owner who may have bad credit or one who relies on payments primarily from credit or debit cards. The person who owns the business will opt for a Merchant cash advance (MCA) to cover expenses of unpaid services or to cover expenses of supplies if they do not have the credit they need to pay for them or even to start their business. Merchant cash advances are, indeed, popular with new business owners who lack credit to get their business up and running.
You might be asking yourself at this point, “Well, isn’t that the same as a loan?” And the answer is – not exactly. A loan is something you can pay back over time, but a merchant cash advance (MCA), is something you take out and the company who gives you the advance takes payment in form of a set agreement where the lender will take payment back one of two ways. They will either take a piece of your future debit or credit card payments as soon as the customer makes payment, or they will take the payments back by Automated Clearing House withdrawals (ACH). This means payback will be withdrawn from your bank by the lender daily or weekly.
To break the difference of a Merchant loan and Merchant cash advance down, even more, it is simple. If you make a loan with a bank, then you will be paid an amount of money that you will pay back at a fixed rate over time and probably on a monthly basis. However, with a cash advance, the lender has rights to your money as it comes in and with no fixed rate and no specific date for payment.
The advance might seem a bit more pricey and harder to pay back if you have hopes at making a profit for your business right away. So, here we are at the cons of a Merchant cash advance. Let’s talk about a few of the cons, and then see if there will be some pros as well.
The main drawback from an MCA, as you can tell, is that it is truly expensive to pay back. There will be a few extras to add in besides the money you want as an advance. With any type of loan or advance the company that is lending it will have a factor rate that you will need to add to the amount they lend you. If you are wondering what a factor rate is, it is all the interest and fees the lender tacks on. Therefore, as you can already tell, a major con to obtaining the advance.
Furthermore, if you are thinking to yourself, “This won’t be so bad. If business booms I can pay it back early.” Well, maybe you should rethink that? If your business does earn growth fast, it won’t be a pro. Unfortunately, it will be a con, because then the lender swipes his payment from you faster than the customer swipes his card, and you won’t even see the profit. You know that old saying; “The more you make, the more they take?” Enough said.
Another con to this lender’s game is credit scores. If you already have a low credit score, MCA’s do nothing to boost your score up. They can actually bring it down if you are unable to make payment. If sales are down, you might find yourself in worse debt than you were trying to dig yourself out of.
And now to the pros of a Merchant cash advance (MCA). After all that we have discussed here, you might be thinking that there are no pros to all the cons. However, as the cons add up, the pros are what I have mentioned earlier in the article. For example; If you have found yourself with bad credit or no credit but want to start your business, this is a valid option.
Another hidden pro would be, if you take out an MCA and it is your first time doing so, the company will probably let you renegotiate your payback terms if the original terms get to be a bit too much over your business budget.
Finally, and the biggest plus in obtaining a Merchant cash advance is that it is fast money with little to no chance of you being disqualified for the cash.
To wrap it all up for the people who read this and still need a definitive definition on what a Merchant cash advance is; a Merchant cash advance or MCA is more for the small business owner who needs a lump sum of money to either get their business started or to get out of debt. Whichever lender they choose will then take payment back from the borrower’s credit card customers or either straight from their banking establishment until they receive all the money paid back with interest.
My final word on MCA’s would be to think carefully before committing to one. Make sure you weigh all other loan options and find the one that would best suit your current needs and credit status. Surf the web for all other options that may be out there and be sure to commit to the one that suits your specific needs as a business owner.
I hope this article has shed some light on what to expect if thinking about taking out a Merchant cash advance for your business. Good Luck.