We all know that running a business can be stressful. Small business owners, retail merchants, even those who run medium and large-scale businesses all know the stresses that come with trying to run a business within the constraints of the resources available. Every month, for the typical business owner, is a balancing act in which the business’ assets and liabilities are arrayed against each other. Critical to this process is sufficient cash flow necessary to keep the business solvent, the bills paid, and vendors providing their wares. But as any business owner knows, sometimes cash reserves fall short. This is when businesses tend to rely on credit, in order to get them through the lean periods where cash is sparse. But what happens when cash is in short supply, but credit is also tight? It is at times like these that a merchant cash advance might be just the thing.
Rosemary Peavler writes, “If a business can’t get a bank loan, a merchant cash advance is a viable alternative if a business has a cash flow problem and an immediate need for cash. Banks have been tight with their money since the beginning of the credit crisis in late 2007. As time has passed during the recession, credit has just gotten tighter. Recently, the Obama Administration strongly urged both large and small banks to increase their lending to small businesses in order to stimulate the economy and speed up economic recovery.”
A merchant cash advance is an arrangement wherein the merchant agrees to sell a portion of its future credit and debit card sales in exchange for a lump sum of money to help it through its cash flow issues. This is a short-term liquidity solution. If you don’t have the cash you need for immediate payments of expenses that are due in the short term, knowing that you’re going to see banner sales a month from now doesn’t do you a whole lot of good, especially if you need to make an immediate purchase or you have bills that must be paid now in order to ensure continued operation. Taking a cash advance against a percentage of your future sales is a great way to give your business the liquidity it needs to continue operating.
A merchant cash advance is not a loan. Loans have specific amounts that are agreed to for repayment on a specific schedule. A merchant cash advance, instead, is a trade against a percentage of future sales, whatever those sales may be. The benefit to the cash advance lender is obvious; the benefit to the borrower is that he or she can obtain needed cash quickly when those liquid funds are required. The higher interest paid is the fee paid for this speed and convenience, not to mention the greater leverage the liquidity possesses inherently.
Merchant cash advances have real advantages as long as interest rates are rising or stay high. If the retailer agrees to pay a percentage of future sales in exchange for the cash advance, those payments will be scaled according to the merchant’s actual sales. This makes a merchant cash advance easier to repay than a conventional loan because the payments are scaled to the merchant’s ability to pay. Cash advances can be put through much more quickly than traditional or conventional loans, so the merchant gets access to liquid cash faster than he or she otherwise might.
Peavler explains, “No regular fixed payments are required by the company. The lender collects a set percentage of the company’s daily credit card sales. The collection continues until the lender recovers what they advanced to the company along with their premium. …[As has already been said] one thing that is attractive to companies about the merchant cash advance is that, when they have a slow sales month, their payment to the advancing company is lower since they collect a set percentage of credit card sales. Another attractive feature is that there is no actual due date for the advance to be paid off. It is paid when enough credit card sales are made for the advancing company to recover the advance and their premium. In addition, no collateral is required to secure the advance. As a result of tight bank credit, small business owners have had to turn to other sources of credit for their financing needs. Merchant cash advances have been one of these sources.”
Of note, where merchant cash advances are concerned, is that because they are not loans, there is no interest rate. The company offering the advance, or premium, simply continues to collect a percentage of sales until the advance is also repaid. This can add up to quite a bit of money when compared to an interest rate, which makes most merchant cash advance rates comparable to credit cards. The rate, however, does not change the way a credit card rate might change. It’s important to remember that a merchant cash advance is just one of the available options when it comes to financing the operations of a business. When credit is hard to get, this may be a viable alternative method of financing. It’s what we call “receivables financing,” in that a percentage of the company’s receivables is exchanged for the liquid cash provided at need.
As Fundera puts it, “With this type of financing, you get a cash advance — usually approved and funded in just a day or two — with very little paperwork involved. In turn, you agree to pay back the advance, plus a fee, by letting the funding provider take a portion of your credit card sales each day until the entire amount has been repaid.” But Fundera also stresses the relative cost: “Fees can range from 15% to 80% APR of the amount financed. However, merchant cash advance providers measure their fees as a factor rate, which can range from 1.14 to 1.48. The advance amount you receive is multiplied by that factor rate to determine the total amount you’ll pay back. …The higher the fixed percentage of your credit card sales you’ll share, the shorter the repayment time frame will be.”
David Naylor writes, “When business heats up, and great ideas are coming in left and right, it is handy to have the money you need to make real changes. Noticeable growth can occur when working capital is available in time to take advantage of valuable opportunities. When you have a good idea to increase your growth and expand your business, alternative funding can turn that great concept into a funded reality. A merchant cash advance can also help you prepare by paying for the extra salaries of staff you will need to handle the extra business. That will lead to satisfied customers, and even more business next year. Or perhaps use a lump sum merchant cash advance to stock up on inventory or purchase equipment. Savvy entrepreneurs thrive when they wisely use a merchant cash advance. Traditional funding can be a long, painstaking process ranging from application, to approval, to closing, to disbursement. The busy entrepreneur could do so much more with the time required to obtain traditional funding. A merchant cash advance is an unsecured loan so you won’t be required to put up any collateral. And you won’t be penalized if your credit is less than perfect, The repayment process is light and easy because the plans typically work with the flow of your business, withdrawing a percentage of your daily, weekly, or monthly credit card sales to pay off the loan amount.”
Michelle Goodman writes a case study for Entrepreneur in which a merchant cash advance worked to the merchant’s advantage. “Considerably more expensive than a bank loan… merchant cash advances don’t have a fixed repayment date. They’re also fast — within 48 hours of applying, [our case study had the money] he requested in hand. …Dozens of financial organizations offer merchant cash advances, without much regulation.”
Goodman urges those considering taking a merchant cash advance to perform due diligence, investigating reputable providers like Infiniti Funding and considering them for their cash advance needs. She also urges prospective borrowers to track several months of their earnings in order to gauge their ability to pay back the cash advance in a reasonable amount of time. “Be wary of extra fees,” she writes. “Application and funding fees are not the norm. Avoid providers who tack on these extra charges.”
Ami Kassar, meanwhile, cautions that if you’re going to seek a merchant cash advance, there are some things you need to consider, such as making sure you see all those fees up front and that you understand them all. You also need to make sure you understand the terms. “Insist that the cash-advance company provide at least a projected annual percentage rate, or A.P.R., for your loan,” she writes. “This makes it much easier to compare the advance with other options.” She also urges borrowers to shop around in the competitive field, to ensure they get the most advantageous rate.
There are some things you need to consider when it comes to merchant cash advance terms. If you’ve ever experienced a bankruptcy, for example, or your business is relatively young, or if you just plain can’t process credit and debit card transactions, it is not likely that you’ll be able to qualify for a merchant cash advance. If you have poor credit, though, you’re not going to be able to secure a more traditional loan. You have permanently been deemed too great a risk, and that means that every time you experience a need for more operating capital, you’re going to find yourself right back the same cash flow lean situation.
Peavler, however, puts it best: “On the other hand, merchant cash advances have helped a lot of small businesses survive, particularly during the recession. If a business has a short-term cash flow problem or needs immediate access to funds, then a merchant cash advance can definitely help. Using it for long-term financing may not be a good idea if the premium for the financing is high. However, if the premium is similar to rates you might get on a bank loan, then you might use merchant cash advances for longer term financial needs, such as buying equipment or investing in product development. Small business survival is necessary to the recovery of the U.S. economy. Since the business credit crisis began, we have seen that if small businesses rely only on commercial banks to fund their business loans, they aren’t going to be able to hire workers, buy inventory, or meet any of their other obligations for survival. They certainly aren’t going to be able to thrive. Small businesses are scrambling to replace bank financing with other types of acceptable financing.”
A merchant cash advance has many advantages that can help your business or retail operation survive lean, cash-poor times. Chief among these, as has already been indicated, is the ability to get your hands on the cash you need quickly. A traditional bank loan takes quite a long time to process, and the paperwork you have to fill out to get one can likewise be quite involved. While this is not true of all merchant cash advance services, it is sometimes possible for you to receive your merchant cash advance with same day speed, or perhaps by the next operating day. Approval rates are very high, meaning that many of the businesses that apply for these advances are able to get them. Another advantage of at least some merchant cash advance services is that they can be filled out and taken care of online, which is another reason the turnaround time is so small. As we’ve discussed at length already, the lack of a fixed repayment schedule makes these types of advances very flexible, because as long as you are prepared to take the receivables hit each time, you can go on operating until you finally have the cash to repay the advance.