Finance · 11 December 2019

The pros and cons of merchant cash advances for a small business

A merchant cash advance is a hidden gem in the world of small business enterprise. Think zero interest, no fixed payment term and a high approval rate. So it’s easy to understand why more and more businesses are opting for merchant cash advances [MCAs] as an alternative means of funding.

But what exactly are MCAs?

And what are the pros and cons for business owners looking for a quick cash fix when facing cash flow difficulties?

MCAs – a quick explanation

Merchant Cash Flow
Too good to be true? What can your business gain by opting for an MCA?

Merchant or business cash advances are advance payments made to a business in exchange for an agreed percentage of future sales through credit or debit cards.

More suited to businesses that take a reasonable proportion of their income through credit or debit cards, a merchant or business cash advance is considered a short term, unsecured business loan based on future sales.

In agreeing to a merchant or business cash advance, a business effectively sells a proportion of their future sales or income in order to receive a large cash sum to aid increased cashflow.

So, what are the benefits?

Merchant cash flow
Experiencing a financial pinch? A merchant cash advance could help.

Compared to conventional business bank loans, merchant cash advances come with a host of benefits to businesses in need of additional cash:

High approval rate: Merchant cash advances have a typically high approval rate when compared to traditional bank loans, meaning younger businesses who often struggle with cash flow are more likely to benefit as a result.

Speedy cash injection: Once a loan has been approved, merchant cash advances have a quick turnaround, where businesses are normally in receipt of their requested cash injection within 24 hours.

No interest rates or APR: Compared to conventional bank loans or other means of business funding, merchant cash advances have zero interest rates, providing a more manageable loan option for both small businesses and start-ups.

No fixed payment amounts: Unlike other business loans, merchant cash advances operate on an agreed percentage as opposed to a fixed payment, where the business in receipt of the loan pays a daily percentage on the sales received. This means that during quieter sales periods, the business does not struggle with the return of high loan payments.

Sounds good, what’s the catch?

Merchant Cash Advance
Do your research fully into MCAs, and whether they’re applicable to you before you invest.

Shorter payment terms: The payment terms offered through a merchant cash advance tends to be shorter than conventional business loans. Therefore, it’s important for the recipient to be as accurate as possible when forecasting future sales to ensure the loan can be repaid in full within the given timeframe.

Not suitable for all businesses: If your business does not receive payments through either debit or credit card, or only a small percentage of sales are received through cards, then it is unlikely that you will be able to receive a sizeable loan amount compared to alternative options.

Use your head…

As any smart business person is aware, it’s important not to nosedive into any money loaning venture, without weighing out the pros and cons. However, an MCA has proved time and time over as the perfect option to have on the back burner when you may find yourself briefly stuck in a tricky financial situation. Want for information? Click here.

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ABOUT THE EXPERT

Michael Foote is the Founder and Managing Director of cost-comparison site, Quote Goat, which compares the costs of both personal and business financial products including Merchant or Business Cash Advances.

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