Business cash flow is vital to a business’ health. Unfortunately, many businesses struggle with cash flow issues even when they are doing well. They may not have the funds to cover payroll and operational expenses due to long receivables or extremely rapid growth. They may not qualify for traditional bank financing due to various factors, including not being in business long enough, showing slow or even negative cash flow, personal credit issues, or being overleveraged in debt. Other businesses prefer to explore alternative forms of financing first in order to avoid taking on additional debt or to get much-needed cash more quickly and with less paperwork.

As we began with part one of this article, if you’re a business struggling with cash flow, you may be considering alternative forms of financing. Two financial tools that work well for businesses with cash flow issues are business factoring and merchant cash advances. In the first part of this two-part series, we discussed business factoring. Today’s post will help you decide if a cash advance loan is right for you.

Cash Advance Loans for Small Businesses and Cash Flow

The cash advance loan or merchant cash advance is a financial tool that small businesses who are experiencing a cash crisis might choose to explore. Perhaps your business is only a few months old, or your most recent tax return shows negative cash flow. Maybe you’re over-leveraged in debt. There are many reasons you might have trouble securing a small-business loan, but you, nevertheless, need a way to access some cash.

When you receive a merchant cash advance, you’re essentially selling a portion of your future sales in exchange for immediate access to lump-sum capital. You get the cash quickly, and you give the lender access to your receivables in order for them to collect on the loan over time.

The advantage of a merchant cash advance is that it’s an unsecured loan that’s pretty simple to get. You’ll supply six months of bank statements to prove that you have a regular income. While your credit score matters, it’s not nearly as important as it is for a small-business loan. And unlike when applying for a small-business loan, you don’t have to supply tax returns, making a merchant cash advance a useful option for companies who have a lot of tax write-offs. The turnaround or approval rate is generally very fast—you can have your money in a matter of days.

What You Need to Know About Cash Advance Loans

It’s important to carefully and objectively assess your current financial situation and determine exactly why you need the funds and what you’ll do with them. Accurate projections of your growth are critical when you choose a merchant cash advance. This is because you’ll pay back these funds through automatic withdrawals from your bank or from your merchant credit-card processor on a daily, weekly, or bi-weekly basis. Each withdrawal is based on an agreed-upon percentage of your credit/debit card sales that time period, so the dollar amount withdrawn each time period will vary depending on your sales volume. The advantage to this is that it can make it easier to automatically pay off larger chunks of the loan during heavy sales periods, and easier to manage the lighter cash flow that occurs during low periods.

A merchant cash advance (MCA) is not a loan, but rather an advance based upon the future revenues or credit card sales of a business. A small business can apply for an MCA and have an advance deposited into its account fairly quickly.

What’s the Catch?

The disadvantage, of course, comes when you have no or low cash flow and can’t afford to pay back the loan. However, defaults on merchant cash advances are still relatively rare, since the lender has access to your bank account, and will continue to collect until the loan is paid in full. Another drawback? The payback rate is generally up to around 30%, meaning if you borrow $10,000, you’ll need to pay back around $13,000. The payback rate is different than the percentage rate held back from your receivables (often called the hold back rate). The holdback rate on a merchant cash advance is usually anywhere from 10% to 20%. Terms vary from one to four years, and you can get access to up to $1.5 million in cash—assuming you have the cash flow to back up that kind of loan.

Is It a Merchant Cash Advance Loan Right for You?

Though you might assume this type of loan is only appropriate for retail establishments, the reality is that any business with a reasonable expectation of ongoing future sales volume can tap into this financial resource. Service businesses, manufacturing companies, distributors, and virtually any other company that accepts credit cards and/or has a stream of receivables can access a merchant cash advance.  

What’s the Bottom Line?

While the rates are high and, yes, you’re going to be handing access to your receivables over to your lender, the merchant cash advance remains a highly useful financial for a wide variety of companies who have decent cash flow but can’t get traditional bank financing.

Want to find out if a merchant cash advance is right for your business? Contact Villa Nova Financing Group to discuss options to boost your business’ cash flow.

And, if you haven’t already, check out Part I of this series, where we discuss another alternative financing option called factoring and explain how you can leverage use this tool to support your business’ financial needs.

Get answers to your questions

We invite you to speak with one of our commercial or residential mortgage experts about your financial and lifestyle goals. This no-obligation consultation can be held over the phone or in our Warren, NJ, office.

  • Please tell us about the type of loan or financing you are exploring.
  • This field is for validation purposes and should be left unchanged.