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Quick Guide to Merchant Cash Advance

A merchant cash advance is a service that lends business owners cash to finance business operations quickly; this especially beneficial in the time of a crisis or emergency. For companies that are unable to obtain a traditional bank loan, merchant advances are another alternative. 

These advances are not loans - to obtain a merchant cash advance, you in fact sell a portion of your future revenues to a finance company. The application process can take anywhere from 24 hours to a week, and many vendors specialize in making it a very quick process.

If you’re interested in building your business credit as well, sign up with one of our business credit vendors for emergency financing.

Benefits of a Merchant Cash Advance

There are a number of benefits to obtaining a merchant cash advance. They represent a source of financing that is easier and faster to obtain than a bank loan – which can prove advantageous in situations where a long wait for cash can prove disastrous for your business.

  • For example, if you own a restaurant and your refrigerator irreparably breaks down, you can’t afford to wait weeks or month to get a loan replace it. A cash advance can mean the difference between staying in business or going bankrupt.
  • The lack of a credit history is the single largest barrier in obtaining financing for businesses less than two years old.  When you apply for a cash advance, you don’t have to provide a company financial history or credit check. For a new business requiring startup funds, a merchant cash advance may in fact be the only large source of funding open to them outside of personal and family assets.
  • If you’re running a growing business, this can be a strategic way to purchase equipment, necessary office furniture, etc just as business starts to come in – this way you are sure you can handle the payments afterwards.

Special Considerations

A merchant cash advance is not a loan. Your payments – usually made over a shorter timeframe six months to a year length – count as future revenues that the finance company purchased from you in advance.

This may seem to be just a difference in semantics, but it has important implications for your business. Because it is not technically considered a loan, a merchant cash advance does not fall under the many regulations and standards to which many traditional loans are held. This means fewer legal protections for your business from unethical or predatory lending practices.

  • Before signing, insist on seeing all future and potential fees that could apply to your cash advance. With already high interest rates on the advance, you may not be able to afford any extra or hidden fees.
  • Be sure that you understand the terms of the advance – as well as the implications. The terms may be couched in ways that seem harmless until you untangle their meaning. Be wary of too-good-to-be-true rates, and make sure to parse out the terms of the loan correctly. You can insist that the company provide you with an APR for your loan.
  • Be sure your financial plan is written out and includes very specific details – you want to be sure you’ll be able to pay it back quickly and avoid incurring high interest.
  • Shop around. The cash advance industry may be less regulated, but it is very competitive. Solicit quotes from several different companies to make sure that you are getting the best rate, and to cull the scammers from the legitimate businesses.

If you approach a merchant cash advance provider with a clear idea of what you can pay back and knowledge of acceptable interest rates, you can find speedy funding you need for your business at a fair rate.

With a cash advance, you can replace faulty equipment, purchase necessary upgrades, take advantage of a windfall, or make important payments. Consider a merchant cash advance if your business is less than two years old or has had trouble acquiring funding in a difficult economy.

If you’re interested in merchant cash advances, you may also want to check out business acquisition loans, business cash advance, and small business loans.