Business owners have a variety of options when it comes to financing their companies. If we are talking about a large, established corporation, the options usually begin with commercial banks that are happy to work with them. But other, smaller business owners, have fewer choices—especially those with bad credit. Thankfully, there are several alternative finance methods that can suit their needs. One such alternative is called a “Merchant Cash Advance” or “MCA.”
What is a Merchant Cash Advance?
Unlike many other types of financing, a Merchant Cash Advance is not “debt,” and it is not even technically a loan. Instead, a Merchant Cash Advance is an upfront payment that a financing company gives to a business in exchange for their future credit and debit sales.
The business owner benefits by getting a lump sum of cash, and the financing (lending) institution benefits by collecting a percentage of the total future credit and debit sales from customers.
There are many scenarios where a business owner might need a quick influx of cash. These can range from the broken equipment to lack of working capital, to season sales swings, or other emergency situations. Either way, when a business owner needs money fast, MCAs offer a solution that few other loans can, as they are faster and require only minimal credit. Businesses are typically more likely to get approved for a Merchant Cash Advance if they have credit above 525, have been in business for at least 2-years, and have an annual cash flow of at least $180,000.
What are the Benefits of a Merchant Cash Advance?
Whenever a business owner, large or small, decided to finance his or her company, they must decide on a number of things including how much money they need, when they are going to be able to pay it back, what are the interest rates, will they get approved, and more. Here are some of the reasons you might land on a Merchant Cash Advance as the idea kind of financing for your business.
Your Credit Doesn’t Need to Be Great
Many long-term low-interest business loans require impeccable credit. That is part of the reason why so many small business owners get denied as they apply for loans for traditional loans from large lending institutions. One of the main reasons so many small businesses fail in the U.S. within just their first few years has to do with simply running out of money. Odds are, many of the small business owners simply do not know there are options available to them outside of the big banks and the most traditional types of loans.
As mentioned, Merchant Cash Advances require a credit of only around 525 or higher. That is not very high at all, considering many types of loans require a credit score of 600 or even into the 700s. The reason MCAs don’t require as much credit is that alternative lending institutions are more interested in the feasibility of your business than they are simply your credit. In other words, if your business is well-established and has a cash flow of $180,000 or more, you are far more likely to get approved than you would simply by having good credit.
The reason things like cash flow matter with Merchant Cash Advances and not every other kind of loan is because by approving you for an MCA, what a lending institution is saying is that they believe your customers will pay their debts. Therefore, by showing the lending institution the history of your customers paying the debts, you are reducing risk and proving that you are “good for” the money you are receiving. The main things lenders want to know about when it comes to Merchant Cash Advances are the length of time your business has been operating, and your monthly credit card returns. If those two variables speak favorably to your application, then you are likely to get approved.
Note that with a Merchant Cash Advance, you also do not need collateral. This is a benefit over other types of business financing that may require you to put up your car, home, or other possessions in order to get approved.
Simple Application and Fast Cash
Many businesses do not have the luxury of spending days apply for a loan, and then weeks waiting for the funding to come through. There are small business owners for whom the matter of a few days can be the difference between their companies surviving and dying. Unfortunately, outside of Merchant Financing (and a few of the other speeds financing methods), this is often what happens, and small businesses lose out.
Thankfully, with the application process for a Merchant, Cash Advances are quick and painless. Yes, a lending institution will need to run a credit check on you, but your credit report does not need to come back nearly as well as it would get approved for other kinds of loans. In most cases, you can get approved for a merchant cash advance with credit as low as 525 if your business has been around for a while and has solid monthly cash flow.
If your business needs cash fast, you do not want to run the risk of defaulting on payments or other mistakes like failing to pay employees. This is especially true if you are certain you have more money coming in the future in the form of credit card payments from customers—it’s just a matter of time. In these cases, a lump sum of cash can help you get your financial house in order so that you are not risking your business. Also, it enables you to have enough day-to-day cash-on-hand to cover unexpected or emergency type expenses.
For example, let’s say you are the owner of a manufacturing company that delivers products to your customers on a regular basis. Let’s say you have only one truck. If that truck breaks down or is in some kind of accident, your business can be in serious trouble. Yes, you might be able to make arrangements to get the items delivered, but you also may not. And, in the latter case, it is critical to your business that you either get the delivery truck running again or get a new one as soon as possible. If you do not have enough cash on-hand to cover such an expense, this is exactly the sort of scenario where a Merchant Cash Advance might be useful.
Collections are Based on Your Business’s Revenue
Unlike traditional loans that demand payment regardless of how much money your company is making in sales, payments on a Merchant Cash Advance are only taken from your business when it makes sales. This makes things far easier and less stressful for you as, instead of having to worry about another (separate) expense, you merely need to focus on running your business properly and serving customers as you always have.
It’s important to understand that a Merchant Cash Advance is not technically a loan. With a loan, you are borrowing money from a lending institution. You are, in other words, taking on debt. With a Merchant Cash Advance, though, you are selling a piece of your future profits. This distinction is important for a number of reasons, including the fact that if you have a slow sales month after taking out a Merchant Cash Advance, that is okay, it just means you will make a small payment that month toward paying back the financial institution who gave you the advance.
Some businesses fall victim to taking out short- or long-term loans for money they think they will have no problem paying back in the future, only to discover that they are in trouble after something goes wrong. The problem with traditional, or even short-term, loans is that they are not built to help people in cases where things do not go according to plan. If you take out a loan with a large commercial bank that states you have to pay them $1,000 a month every month, then you have to live up to that contract every single month regardless of your sales profits. This is not the case with a Merchant Cash Advance. In an MCA, if your business makes less money one month, it pays less that month, if it makes more the next month, then you pay more. This kind of arraignment makes it much easier to plan your business’s financial future.
Merchant Cash Advance Flexibility
Another great feature of the Merchant Cash Advance is that they are highly flexible. While many types of financing are attached to specific purchases or expenses, an MCA can be used in whatever way you’d like. If your business has multiple things, all of which need to be covered, you can go ahead and determine that for yourself as the business owner and then spend the money how you’d like.
Let’s say your business has some necessary repairs, but you also want to start a new marketing campaign. A Merchant Cash Advance is one of the few financial vehicles that will enable you to do both with very little stress. All you need is an established business, decent credit (usually at or above 525), and proof of monthly sales. With those three things, you can easily take out the money you need and then spend it how you like. If the new marking efforts pay off and your business starts increasing its sales, then great! That means a greater amount of your monthly sales will be taken out and used to pay back the MCA company. If marketing does not work and sales stay the same, don’t worry! It just means you will pay the MCA company less money per month, but not that you will need to bankrupt yourself or your business to maintain set monthly payments.
You Aren’t Putting Your Credit Report on the Line
When taking out many types of loans, you are required to put your personal credit on the line. If, in other words, you miss a payment on the loan or default, the issue will be reported to a credit reporting agency, and your credit score will potentially go down.
Putting your credit score at risk is a dangerous move for any business owner. Having solid credit gives business owners flexibility and options in emergency situations. There are times when, as a small business owner, you may be forced to use your credit in order to save or grow your business in a big way. There are also times in your personal life where you want to have good credit. These can include when you are buying your house, or if you want to take a loan out on a new car, or for some other reason. Either way, the fact is that your credit rating is important both to you personally and to your business. It is critical, therefore, that you do everything you can to protect it. That includes only putting your credit score at risk if and when you have to. Thankfully, when it comes to financing, you don’t have to!
A Merchant Cash Advance does not require that business owners risk their credits in order to get approved. Since your payments and ability to pay are based on how much money your business takes in, there is no need for lending institutions to put so much weight on your credit score, they can simply look at your monthly revenue, plus the overall legitimacy of your business and decide from there. That is not to say that your credit won’t play a role in your approval—it will. But your credit will not be affected based on how long you take to pay off your Merchant Cash Advance.
There you have it, some of the reasons you should consider a Merchant Cash Advance for your business. Whether you go with an MCA or not, the important thing to remember is that you have options! Your business options are not limited only to large commercial lending institutions.
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