Merchant cash advances are risky, but they can be a helpful tool if used correctly. Are they right for your business?
Running a successful business requires regular cash flow and working capital. Every business goes through periods when sales are down and money is tight. When this happens, you may look to outside sources of funding. One of the various types of small business funding is a merchant cash advance.В
What is a cash advance loan?
A cash advance allows you to borrow an immediate amount against your future income вЂ“ the lender is “advancing” you the cash before you are paid. Technically, you are selling your future revenue in exchange for cash today, so a cash advance is different from a typical loan.В
Personal cash advance loans are borrowed against your next payday, when the lender debits your checking account for the amount you borrowed вЂ“ with additional fees. Lenders sometimes have borrowers write a check for the loan plus fees, then cash the check after the borrower receives the money.В
The fees for these loans are often very high and can leave you saddled with significant debt. Cash advance loans are sometimes considered predatory. However, they can provide vital cash flow if you don’t own a credit card.В
There is a specific type of cash advance available вЂ“ called a merchant cash advance loan вЂ“ if your company needs immediate funding.
What is a merchant cash advance?
Merchant cash advance loans are a source of short-term funding if you cannot obtain financing from a bank or other source. These advances are borrowed against future credit card sales, and most of them are repaid вЂ“ plus the associated fees вЂ“ within six to 12 months.
To obtain a merchant cash advance, your business must have daily credit card transactions from your patrons and proof of at least four months of credit sales. Many merchant cash advance companies require that your monthly credit card sales be between $2,500 and $5,000 вЂ“ depending on the amount of the advance. This allows the lender to confirm that you can repay the advance.
How do merchant cash advances work?
Merchant cash advance companies will most likely work with your business if you rely primarily on debit and credit card sales. This includes retail, service shops and the restaurant industries. However, these are two structures that would allow your company to get an advance if you don’t have high debit or credit sales:В
Traditional merchant cash advance: Your businesses would gain an upfront sum with a traditional merchant cash advance. To repay the loan, a https://paydayloansohio.net/cities/delaware/ set percentage of daily or weekly sales is debited back to the cash advance firm until the advance вЂ“ plus fees вЂ“ is repaid. This is also known as a “holdback.” The higher your company’s sales, the faster the advance is repaid. However, do not encourage your customers to pay in cash to avoid a percentage of their sales going to repayment, as this is a breach of contract and could result in litigation.
- ACH merchant cash advance: With an ACH merchant cash advance, you would receive a sum upfront, then repay the advance through your company’s checking account. A fixed daily or weekly sum is transferred from your business checking account through an automated clearing house (ACH) withdrawal until the advance вЂ“ plus fees вЂ“ is repaid. Unlike a traditional merchant cash advance, the debited amount remains the same regardless of your company’s sales. These advances can be paid off more quickly than an advance that is debited against sales, unless your business runs out of available cash; in which case, you may be unable to make your daily or weekly payment.В