Merchant cash advances (MCAs) provide businesses with funding in exchange for future credit card and debit card sales, helping to improve cash flow by covering inventory purchases or marketing costs. Unfortunately, MCAs can also be expensive if the amount borrowed isn’t repaid, which makes it essential to weigh the benefits and costs before taking this route of financing.
Merchant cash advances provide one of the main advantages of merchant cash advances: their processing times tend to be faster than traditional loans; some providers can offer 7-10 day turnaround from application to receiving funds. This fast processing also means your business may qualify even if it doesn’t meet some lenders’ stringent criteria (e.g. requiring high personal or business credit score), making merchant cash advances ideal when emergency funding is needed due to natural disaster damage or in order to purchase essential supplies.
Merchant cash advances offer another benefit of being quickly paid back compared to traditional loans: some lenders provide flexible repayment schedules and don’t require that you personally guarantee the loan, which can be especially helpful if your credit has been poor in the past or you were rejected for loans altogether. Furthermore, this form of lending could be the ideal solution for newer businesses without yet established a credit history.
One potential drawback of merchant cash advances is their cost, particularly during periods of low sales. Payments are calculated based on credit card and debit card sales, meaning it could cost more than you earn during such days. Therefore, it’s essential that lenders provide clear repayment structures and rates so you understand exactly how much you owe.
Some lenders add monthly administration fees to your factor rate, which can add an extra expense for your MCA. Prepaying it might help save some money, but it won’t lower the factor rate or help prevent future withdrawals from sales; some MCAs also come with prepayment penalties that result in extra fees being assessed on remaining balances of advances. Ultimately, avoid using MCAs to cover long-term expenses like inventory purchase or facility development; seek more affordable sources such as business loans instead.