If you are a small business experiencing cash flow challenges, you are not the only one. Over half of start-up businesses collapse due to a lack of cash flow. It occurs when your monthly expenditures are above your actual earnings resulting from failure by consumers to pay their bills and slow sales. It may lead you to consider taking a merchant cash advance (MCA) which may be effective in certain situations. Below is important information concerning MCAs to determine whether your small business should apply for a merchant cash advance.
What Is a Merchant Cash Advance?
A merchant Cash Advance (MCA) enables you to recover from short-term cash flow complications in your future earnings. You will obtain a large amount of money and then repay it with a certain percentage of your profits from credit and debit sales. An MCA is suitable for businesses that deal with many debit card and credit card transactions and require access to funds quickly. Therefore if your enterprise does not allow debit or credit cards, you cannot qualify for a merchant cash advance.
Eligibility
It is simple to qualify for a merchant cash advance because you do not need to present your years of operation contrary to the start-up business loans. In most cases, you are not required to have a good credit score. You only need to confirm no less than six months of credit transactions. Having a history of good profits can allow you to access a merchant cash advance, especially if you have a bad credit score. The usual banks do not provide MCAs; therefore, you should look for a different lender. Loan servicing software platforms or lending marketplaces should be a great option as you may be able to fill in just one application and compare the various offers from lenders. After choosing a lender, you will be required to fill an application and give specific details such as contact details, company information, proof of identity, business tax returns, the amount you require, and credit card and bank statements.
The Advantages and Disadvantages of Merchant Cash Advances
Various lenders have different advantages and limitations that you should consider before requesting a loan.
Advantages
- Merchant cash advances are good alternatives instead of start-up business loans. Certain small businesses do not have the business experience or credit history of obtaining a small business loan. Merchant cash advances are, therefore, a good option as long as you can provide a good amount of credit card transactions.
- They do not need collateral but only a commission percentage of your credit card payments in the future.
- They have a simple application and approval procedure which might only take twenty-four hours. Unlike small business loans, the MCA does not require a lot of paperwork and might only take a few days.
- You can use it to grow your small business in any way because there are no restrictions on how you should use the funds.
Disadvantages
- The government does not regulate them.
- They can increase cash flow issues in your business.
- They are very costly.
- They will not enable you to improve the credit score of your business.
When To Take a Merchant Cash Advance
Qualifying for a merchant cash advance does not indicate that you should request one. Taking a loan is usually a calculated risk; hence, the challenges associated with bank loans are similar to borrowing credit advances. It would be best to choose a different funding option in debt, such as a different loan with better interest rates and reasonable terms. Even if you do not repay them monthly, cash advances are also debts, and you will need a certain amount of your business profits to repay them. Therefore, if you are experiencing some financial challenges, adding debt will only strain your business further. However, MCA might be a good option if your business has a good cash flow and wants to grow your enterprise, but you cannot qualify for a typical loan. If you can access a small business loan, it may be best to borrow it instead.
The Bottom Line
Low cash flow may prevent you from growing your business and carrying out the daily operations. It may lead you to consider taking a merchant cash advance which may not be suitable in some instances. As a result, you should be cautious as the government does not regulate them, and they can be costly. However, a merchant cash advance can prevent you from being trapped in an endless cycle of debts and poor cash flow.
