When running a business, you expect that its management won’t be a smooth run all the way. There are times when your cash flow could be so constricted that you have to look for a financial boost. Your best option could be to visit a bank for a conventional loan but the approval process is sometimes lengthy and thus a bit inconvenient when you have financial emergencies. When you need an alternative to a bank loan as a merchant, a cash advance apps can be quick and ideal. In this piece, we will briefly look at some things you should know about merchant cash advances.
1. The Meaning of Merchant Cash Advance
For starters, we need to know what merchant cash advance is in detail. As the name implies, this is an advance payment given to merchants by cash advance providers. As explained by the professionals behind Nav.com, the cash advance is given as an upfront lump sum to the business owner, and then paid back using a portion of the sales made. This way, merchants can get quick access to cash, along with other benefits like flexible payment, no credit checks, and no collateral. However, it also comes with a few downsides such as the following:
* A bit more expensive than conventional loans
* Merchant is required to accept credit cards
* It could come with minimum daily payments
* It may not help build credit for the business
2. How Does It Work?
One of the unique characteristics of this business financing option is repayment. First, you acquire the loan from the lenders. You must have in mind what you need the loan for. You will then have to agree on the repayment terms. The main reason the loan is said to be unique is in the sense that the payments are made from a certain percentage of the sales the business makes. This means that the lender will have to know what percentage of your sales is going to go to them each time you make sales. When your business has been thriving and all you need is a boost to make sure you have a smooth run, the loan can be approved easily. Based on the amount you take, cash advances could take about six to twenty months to pay back.
3. How to Know If You Qualify
Even though the loan is easy to approve and its payment is quite flexible since it fluctuates with your sales, there is an eligibility criterion that lenders have to stick to. The qualification is itself very lenient as the loan is made in such a way that it is easier to work with than the traditional loans. While most lenders will ask for several documents before approving your loan, the merchant cash advance lenders will in most cases ask for your last 4-6 months of bank statements and a few other documents. Their main concern is usually how much money your business is making per day so they are sure your sales are enough for you to pay them back. The loan is structured in such a way that small business operators can get some cash to keep their businesses running without having to go through a hectic process with no assurance of loan approval.
4. Best Businesses for Using Cash Advances
While these loans have several benefits, they don’t come without some flaws. As seen above, you have a few reasons to be cautious before taking a cash advance loan for your business. You also need to know if your business is suitable enough to get it. The following industries are great candidates for this financing option:
Retail- retail ventures experience fluctuations in that from time to time, the sales move up and down unexpectedly. This makes the merchant cash advances ideal for them since the repayments are made from a certain percentage of the sales made.
Cafes and other food outlets- these businesses are faced with unexpected costs that require urgent cash, which can be sourced that way. Their sales also fluctuate from time to time. The repayment method of this loan is suitable for such a business.
5. Choosing the Best Merchant Cash Advance
When opting for this option, you need to keep in the rates and the time you have before you can repay the loan. As much as the payments are flexible, you should consider lenders whose rates are favorable for your business. Look for lenders that will offer you the loans at affordable rates; rates that won’t handicap the running of your business. Read the agreement they provide you with and make sure you understand everything in it.
Merchant cash advances can be a good option if you have an urgent financial need or your business has just started. When the loan acquisition process is something you want to avoid or you can’t predict how profitable your business is going to be after you have acquired the loan, the merchant cash advance option could also be ideal. The above few tips should enlighten you more about this alternative financing option for small businesses.
This is a different type of loan and would not work for all businesses. I can see how it would help some businesses.