A merchant cash advance is designed for retailers receiving a high proportion of payments via credit card or EFTPOS, such as shops, cafés and restaurants. For these businesses, cash flow can sometimes create difficulties, and funds are needed in a hurry to keep operating, pay debts, meet unexpected expenses, purchase stock, pay employees, undertake marketing campaigns or to act on business goals.
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A merchant cash advance provides the applicant with funds in a much more timely fashion than traditional long-term business loans.
What is a merchant cash advance?
This type of loan is different to traditional loan products, but as a viable and innovative alternative, is becoming more popular option. Essentially, it is a cash advance that assists business with their current cash flow, alleviating any related financial difficulties quickly.
A lender purchases a business’s future cash flow, so future transactions are used to repay the borrowed funds, in addition to a fee charged by the lender for the loan product. The lender takes a percentage (usually up to around 20%) of each future sale the business makes until the debt is fully repaid, called a ‘holdback’.
The fee is set before the cash advance loan is approved and the funds provided, and can be as much as 40% of the funds borrowed. You can borrow anywhere from $5000 up to around $500,000 with a merchant cash advance, with the loan being for a short period, usually up to around 12 months.
4 reasons businesses might choose a merchant cash advance
The major benefits of a merchant cash advance are:
Simplicity and speed The paperwork is minimal and the loan can be approved in as little as 24 hours, and at the most a few weeks. Similar to an unsecured business loan, you can get fast access to funds. The process for traditional business loan approval has a much longer turnaround time.
It’s easy to qualify The main reason a merchant cash advance can be approved so quickly, and the funds delivered in such a short time frame, is down to the fact that there are limited credit checks and financial history required. In some cases there are no credit checks or financials needed (especially for smaller amounts), and even if they are carried out, borrowers don’t need a perfect credit score. Instead the lender looks at the business’s income to determine if the funds can be repaid.
The funds are unsecured This is a fairly unique feature of this loan. Most other loans require collateral to secure the funds, including business or personal assets, such as a car or property. In the case of a merchant cash advance, however, the borrowed funds are secured by or tied to your future transactions or income, so collateral isn’t required.
Repayment flexibility The amount you pay back isn’t fixed, and the loan term isn’t set. Rather repayments are tied to the business’s income since the lender will take a slice of each sale. This means there’s no pressure to pay a significant sum if sales are slow. During these times you’ll pay the loan back at a slower rate, and when it’s busy you’ll repay the loan faster.
Pros and Cons of a merchant cash advance
As merchant cash advances operate differently to traditional loan products, it is important to have an understanding of the pros and cons so that you can decide what is best for your business.
No fixed monthly repayment or interest
More costly than traditional financing, with high fixed fees
No collateral required and owner’s assets not at risk
Must make daily credit card transactions. Customers paying cash could be a breach of your agreement.
Quick access to funding
Minimum in credit card billings
Helpful for those who don’t qualify for a traditional loan
Never lasts more than one year
How does a merchant cash advance work?
The process of applying for a merchant cash advance loan and receiving the funds is fairly easy:
Determine your eligibility The requirements vary between lenders, but as a guide you’ll need to have been operating for at least six months and be making around $5,000 in regular monthly sales to be eligible to apply.
Apply For some lenders this can be done online, and with little details required, is a quick process.
Receive approval and your funds The money can be delivered in as little as 24 hours after approval.
Make repayments based on agreed terms The lender will take the agreed percentage from each sale.
Costs A merchant cash advance can be expensive, especially compared to a traditional business loan, although it can be cheaper than a credit card. Consider what you’re using the funds for, if you really need the money and whether it’s worth the cost, and only borrow what you really need. You also need to know exactly how you will manage repayments.
Merchant Cash Advance FAQ
What is the interest rate?
Because a merchant cash advance is an advance against a business asset, rather than a loan, there is no interest charged. The cost of the advance is a set fee that will be disclosed upfront. This fee is also based on other elements, such as risk factors.
Is my startup business eligible for a merchant cash advance?
Many lenders will not provide this type of financing to a business that has been operating for less than 6 months. Also, it will depend on the type of startup you are operating, as a cash advance loan is designed for retailers receiving a high proportion of their payments via credit card or EFTPOS.
How much can I borrow as an advance?
You can borrow anywhere from $5000 up to around $500,000.
What is the duration of a cash advance loan?
Usually, the loan will operate for a short period of up to 12 months.