Pros and cons of merchant cash advance

In the 1990s, a Connecticut businesswoman named Barbara Johnson find myself in a predicament: She wants to launch a summer marketing campaign for her Gymboree Playgroup & Music brand, but she doesn’t have the necessary capital. Instead of giving up on the idea, Johnson got creative. She knows parents will be sending their kids back to the classroom in the fall and wonders if she can borrow those revenues in the future.

This is the origin of merchant cash advance (MCA), a form of small business financing that allows companies to use their future credit card receipts today. Today, MCA is commonly used by companies that process large volumes of credit card transactions.

According to a recent report, the small business MCA market hit $8.6 billion in 2014, is expected to grow to $15.3 billion in 2017, with no signs of slowing down. This is Not because MCA is the “best” financial product for small businesses. Since the financial crash of 2007-2008, banks have less and less inclined to lend money to small businesses. However, a majority of small business owners deal with cash flow challenges each year. Instead of turning to banks, these business owners were forced to look for other options. Many of them have turned to MCA because it is a quick and easy form of funding.

Does that mean they are the best option for your business? To help answer that question, let’s evaluate the pros and cons of this type of small business funding.

Pro #1: Fast Funding

A merchant cash advance is one of the fastest forms of small business financing available. The registration process is a cinch; you usually only need to submit a few months’ worth of credit card and bank statements. If you apply online and get approved, the money can be in your business’s bank account within 24 to 48 hours.

Pro #2: No fixed monthly installments

Small business owners who do an MCA repay their lenders by offering them a fixed percentage of their credit card receipts each month (e.g. 10%). You won’t have to worry about not being able to repay your installment in the event of slower-than-expected sales because lenders take a flat percentage of your proceeds no matter how high or low they are. short.

Pro #3: You Can Qualify Even If You Have Bad Credit

Securing a traditional small business loan from a bank often requires a near-perfect credit score. The MCA makes no such provisions. Lenders are more concerned with the future of the borrower’s business — not the past.

Pro #4: You don’t have to put up any collateral

Some small business financing options require the borrower to have collateral (for example, property or equipment) to secure funding. In the event that the borrower is unable to repay the loan, the lender can offset their costs by selling the collateral. MCAs allow small business owners to fund their operations without having to worry about losing their assets in case things take a turn for the worse.

Pro #5: The amount you owe never increases

Once you’re approved for a cash advance to the seller, you’ll need to repay the loan plus a factor fee charged by the lender. You’ll know in advance exactly how much you’ll need to pay back to pay your account. With MCA, there is no such thing as late fees and interest never accrues.

Number 1: One of the most expensive forms of small business funding

Sellers’ cash advances are quite expensive. In fact, according to an estimate, MCAs can have annual percentage rates (APRs) as high as 350%. Business owners who go this route are pursuing one of the most expensive form finance.

Problem 2: It’s a temporary solution to business problems

While an MCA can certainly help some small business owners with temporary cash shortages, it’s not a long-term solution. How can you expect your business to reach the next level when someone eats into your profits every day?

Problem 3: Money is deducted daily, hurting your cash flow

Many MCA lenders deduct money from your credit card receipts on a daily basis. If you need to finance your small business because you are having cash flow problems, it doesn’t make sense to borrow from a loan company that is eating into your revenue on a daily basis.

Number 4: Lenders operating in an unregulated industry

Sellers’ cash advance lenders operate in a largely unregulated market, which allows them to charge outrageous interest rates. Some industry analystHowever, believe that it is only a matter of time before the MCA is regulated. In any case, since they are currently unregulated, no one can find out to ensure that borrowers are getting a fair deal.

5th Opinion: You may lose some control over your business

Some MCA providers will only lend money to businesses if they agree to operate under the certain instructions. For example, they may not allow borrowers to incentivize their customers to pay in cash. They may also not allow you to close for an extended period (e.g. going on a month-long vacation) until the loan is repaid.

If your business handles a lot of credit card transactions and you need a temporary financial solution that you’re willing to pay a lot for, a merchant cash advance might be right for you. . On the other hand, if the MCA sounds more harmful than helpful, then you’re not out of options. Pass here to learn about some of the other forms of small business funding available to you.

Want more information about MCA? See our Comprehensive Guide to Cash Advances for Merchants.

Learn the details of 3 popular SMB funding options