If you are running a business and want it to grow and thrive you may be looking for alternative sources of funding. One option that many companies turn to is the Merchant Cash Advance (MCA). These funding sources seem to be ideal for any company that cannot secure traditional funding but they may not be right for every company. Here is what you need to know about them so that you can tell whether they will suit your need for funding.
How does a Merchant Cash Advance actually work?
In order for you to be able to tell whether this type of funding is right for you, it is important to learn exactly what this method of generating capital actually is. In its most basic form, a company is able to borrow money in a lump sum. The company agrees to give the lending company a set amount of their credit card and debit card sales.
There are a few advantages to this system:
• Short repayment time frame: Usually, the contract specifies that the money will be paid back in two years or less. This can be appealing since it allows a company to rid itself of debt quickly. Some small business owners do not want a long-term loan hanging over their head.
• Small payments made on a frequent basis: The borrower will often make payments to clear their debt on a more frequent basis then they would with a conventional loan. Often, a payment is made each day rather than biweekly or monthly
• A business is not held to a set repayment structure. This means that even when sales are lower than normal a company will not need to come up with payments.
Small businesses typically do best when the owner or operator can control their cash flow as precisely as possible. While this system seems like it would be very advantageous to a business, there are some drawbacks that you need to be aware of before entering into a merchant cash advance agreement.These are:
• A lack of set regulations covering interest rates and lending terms. Unlike a traditional loan, a company providing merchant cash advance’s to companies is not held to the same government regulations surrounding loans. Often, interest rates can be very high and this may cause problems for some smaller businesses. Depending on the company that you deal with, your interest rates may range from 9% to 50%
• They may not be able to meet the needs of your business. Because the loan is paid back based on the money you get from debit card and credit card use, it means that less income will be coming in. If you are getting an MCA to ensure you have more funds available for your use, this type of funding situation may actually make your problem worse
There are other disadvantages as well that may mean an MCA is not suitable for your needs. These are very valid points and it is worthwhile to factor them into your decision regarding whether or not to enter into a merchant cash advance agreement.
Why Small Businesses Like these Arrangements
There are many small businesses which use these funding arrangements and benefit from them in spite of the significant risks. You may be wondering why some companies would risk the heavy disadvantages and seek this kind of funding. It’s quite simple: this may be the only source of funding that a company may be able to secure.
Often larger companies will have an established credit rating and a relationship with a financial institution. Smaller companies may not have the collateral or the credit history in order to secure traditional funding. Still other companies may need money very quickly or may not have the collateral that they need for a bank to lend them money. In any one of these situations, a business may benefit from the use of a merchant cash advance.
What to Ask a Merchant Cash Advance Provider
There are a few things that you should discuss with a company that is offering you an MCA. One thing to ask is whether or not the payment percentage is negotiable. Some companies will allow a business to change their repayment rate based on the company’s income. Others may not. You also need to look into how the diversion of your credit and debit sales will affect the amount of cash you have available for your business. A good financial adviser should be able to look over the terms of your merchant cash advance in order to determine whether it is right for your business.
What to do if an MCA is not your Best Option
If you have checked over the terms of an MCA and have determined that they are not right for your business you can then look at a number of other funding options including SBA microloans or invoice factoring in order to tell which one will suit your needs.