All About Merchant Cash Advances

If you’ve been looking at common forms of business funding, you’ve probably heard of at least one person mentioning merchant cash advances.  MCA’s, as they’re sometimes called, are the most common loan alternative out there for new business owners, and they are beginning to explode in popularity.  Popular as they may be, they aren’t always the best route for everyone.

What Are Merchant Cash Advances?

When you take out a merchant cash advance, you’re technically letting a company buy your future sales profits at a discount.  This means that merchant cash advances are technically not a loan, and it also means that your payments will be based on how well your business does.  If you don’t make a single sale in a week, the payment you’ll owe for that week will be zero.  If you manage to break a personal record, the amount of money you owe will be much higher than usual – which means you’ll pay the sale off faster than you thought possible.

How Do Cash Advances Differ From Loans?

Much of the differences between loans and merchant cash advances exist solely because of the current legal climate in the finance world.  Since cash advances aren’t loans in the most commons sense of the word, much of the regulations that are enforced in the loan industry don’t apply.  On one hand, this means that MCA companies can offer advances to businesses that don’t always have good credit.  It also can mean that the approvals for an advance can happen in a much shorter amount of time, since due diligence doesn’t have to be as thorough.

There is a major pitfall that people should be aware of when it comes to cash advances, and that pitfall is the interest rates.  The tradeoff for the fast, relatively easy money of a merchant cash advance comes in the form of a high interest rates.  Depending on the terms of your advance, the interest rate can be as much as 20% or more per month.

Is A Cash Advance Right For You?

Cash advances are most typically used as a loan alternative for people or companies that cannot get a loan due to a credit score issue.  There are other reasons why a cash advance may be used.  Banks may designate your industry to be too risky to lend to.  Certain industries, including media, adult-oriented groups, and firearms dealing, are considered to be too much of a liability for lenders.  In fact, many merchant cash advance groups might even reject you based on risky industry affiliations or products.  However, there are still some merchant advances out there that focus on high-risk groups, and they’re often risky industries’ saving grace.

You may need the money very quickly.  In the world of business, there’s often no time to work on improving credit or wait on a loan.  Sometimes, you need the money yesterday.  Regular bank loans don’t offer fast cash, which means that merchant cash advances are usually the only option around.

Banks turned you down because you weren’t in business long enough, or because you didn’t have enough equity.  Usually, this indicates that a merchant cash advance might be your only choice.

Basically, most cash advance applications happen because of three factors – risk, business credit scores, or situational issues.  If you need money fast, and have no issue with a higher interest rate, a merchant cash advance might be the best option.  Otherwise, it may be in your best interest to see if you can get a loan after improving business credit for a couple of months.