Pros and Cons of a Merchant Cash Advance
All businesses need working capital to ensure that they can meet their daily operating requirements, make necessary repairs, pay employees, and manage other operational costs. When times get tough, it is good to understand what options are available for loans. Often, the need for help arises very quickly. In these cases, traditional loans may not be options as their processing and answer time can stretch into months. Merchant cash advances are quickly and easily secured.
With loan repayments generated from future credit card sales, the money offered with this sort of loan may be available in very short order. Some clients find themselves receiving affirmation of the loan within 48-hours, but normal response time is around a week.
While other lenders will require many types of verifiable documentation regarding financial and loan histories, merchant cash advance providers are interested primarily in the amount of credit card sales a company makes. Providing basic information, including some financial statements and credit card sales totals and averages for the last three to six months may satisfy all documentation needs. Furthermore, because the repayment is made based on a fraction of each credit card sale, minimum monthly payments are not necessary benchmarks.
Along with these quick access benefits come several disadvantages. For one thing, merchant cash advance loans can be quite expensive. Some lenders take as much as 25% of each credit card sale. With item markets often only 100% of the items cost to seller, 25% represents a sizable chunk. Calculating this high percentage against actual profits once other overhead is determined, many business people may find the fees exorbitant. Alongside this high expense, annual percentage rates may fall between 60 and 200%. For many business owners, a loan such as this might actually cause greater financial burden as it eats into what might otherwise be profit.
While banks and traditional lending institutions are heavily regulated, merchant cash advances have fairly few restrictions. That is one reason they are so easily obtained, and for those who find themselves able to turn a profit under the high fees this makes them the only choice in certain situations. But such freedom also presents a danger to borrowers as many institutions making this sort of loan add stringent clauses and requirements that are burdensome to the businesses accepting them.
The old adage “Never a borrower nor a lender be” is challenged daily in the world of small business, but there are many conditions those who are considering taking out a business loan should consider. After all is said and done, a merchant cash advance may fit the bill.