Small Business Funding: Why a Merchant Cash Advance Might be a Better Option than a Bank Loan

As a business owner, you know that the most precious and coveted asset on the business landscape isn’t necessarily customers: it’s cash. Indeed, with sufficient working capital you can take care of expenses, fund investments, and ensure that your business remains strong and successful for the long-term.

However, before you reach out to a bank and apply for a small business loan, you might instead want to focus on an interesting product that a growing number of retailers are taking advantage of: a merchant cash advance.

First of all: technically speaking, a merchant cash advance isn’t a loan. Rather, it’s an advance (hence the name) on future sales, and it’s designed for retailers who conduct most or all of their transactions via credit or debit card.

Here’s how a merchant cash advance works: you and a lender identify a funding amount and total cost of borrowing. For example, to borrow $100,000, let’s say you agree to pay back $120,000. Importantly, you can do anything with the funds that you wish, such as hire staff, buy inventory, fund marketing campaigns, expand locations, install new CRM software, and so on. Unlike a bank small business loan that is for a specific purpose, with a merchant cash advance you’re in control of all spending.

Another important — and beneficial — difference between a merchant cash advance and a bank small business loan, is how the funds are paid back. Rather than a fixed monthly (or bi-weekly, etc.) amount, you agree to set aside a small percentage of payment card sales. The amount is calculated and transferred at the end of each business day. For example, if you sell $400 worth of goods and services and the repayment rate is 3 percent, then $12 of that is remitted to the lender. This happens automatically, which means you don’t have to deal with extra administration.

The above process continues until the full agreed upon amount is paid back — which in the example above, is $120,000. It doesn’t matter whether it takes you six months to pay the amount back, or a year. This is worth noting, because with some kinds of loans you’re penalized for taking longer than a certain period of time to pay back the loan. With a merchant cash advance, there’s no such penalty. If you owe $120,000, then you pay back $120,000.

And last but certainly not least: if you’re searching for business loans with bad credit, then a merchant cash advance is likely to be much more viable — since most banks and credit unions won’t even consider an applicant that doesn’t have outstanding personal and business credit scores. You also don’t need several years of operational history, as usually a few months is fine.

In light of the above: is a merchant cash advance right for your business? That’s not a question that this (or any) article can answer for you. But now that it’s on your radar screen, you can conduct your due diligence and see if it makes sense to keep your business strong and successful for years to come!

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