What is a Cash Advance and Why Businesses Need it? | Aspire

Written by
Marissa Saini
Last Modified on
December 19, 2023

If you've been researching ways to get fast funding for your business, you may have considered a cash advance as your preferred choice for its fast and flexible financing method but what exactly is a cash advance or merchant cash advance?

What is a Cash Advance?

A cash advance is a service provided by most credit card based on your credit card transactions. It allows cardholders to withdraw up to 90% of your granted credit limit as cash from the bank or financial institutions - hence the name as you receive a cash advance. Where else Merchant Cash Advance (MCA)-  also known as Business Cash Advance payment advance - is a form of financing you cash in exchange for your future credit card sale with an additional fee.

Difference between Cash Advances and Loan

Both business loans and cash advances can provide business with immediate capital but the main difference lies in the repayment method. Merchant cash advance repayments can be structured in two ways:

  • Instant cash in exchange for a slice of your future credit and debit card sales. This refers to the percentage of your credit card sales that are withheld to pay off your cash advance.
  • Instant cash and repaid by a fixed debit from your bank account that is withdrawn aka Automated Clearing House (ACH)

How can a Cash Advance help my business?

A business cash advance is a great option for businesses in need of a fast, instant and looking for a short term financing support. It can be used to fund a variety of business needs, such as unexpected expenses, inventory purchases, cash flow gaps due to seasonal fluctuations and marketing activities. Furthermore, most companies am for growth and expansion and this involved large and long-term projects that could cost more than the retained profits. Which is why the use of debt by large or small companies are often a sensible strategy. For big companies, highly-valued shares do not translate into liquidity nor cash. Otherwise, by selling their shares to raise funds, it will dilute shareholders and beat down the share price.

Eligibility of business cash advance

All businesses need extra funds for them to grow, expand and increase their buying power, it's no doubt that most businesses will find it handy to have standby funds. Many businesses have become very interested in it but are your business eligible for it?

The following are general requirements that can help you assess if a merchant cash advance is a good fit for your business:

  • You receive the majority of your payments through credit cards: Businesses that receive the majority of their payments through credit cards are a good fit for merchant cash advances. Examples include restaurants, retail businesses and beauty salons.
  • You’re running a seasonal business: Instead of paying off a fixed sum, your repayments are based on your daily or weekly credit card receipts. This can be a boon for seasonal businesses since paying off a smaller sum during lull periods will help ease the strain on your cash flow.
  • You require quick access to funding: Compared to the drawn-out application and onboarding processes typical of banks and traditional lenders, merchant cash advance providers may approve your application within hours, and provide access to funding within a few days. This makes it a great option where financing is needed urgently, such as when unexpected expenses crop up or when you require funding to take advantage of time-sensitive business opportunities.
  • You don’t qualify for traditional loans: Merchant cash advance providers are most concerned about the volume and consistency of your sales, and have less stringent criteria compared to traditional lenders; in general, collateral isn’t required and credit checks aren’t performed. As such, a merchant cash advance can be a viable option for small businesses or newly established ventures without established credit history or don’t meet the lending criteria imposed by traditional lenders.

Tips to help you prepare for your cash advance application

Ask for weekly payments

While most merchant cash advance providers require daily payments, there are certain companies that offer alternative repayment schedules. Merchant cash advances are one of the most expensive forms of small business financing - and coupled with a daily repayment schedule can easily create cash flow strains for your business. As such, it’s best to opt for weekly payments where possible.

Apply at the right time

If you’ve only just begun to accept credit card payments, or are a newly established venture, it’s best to wait to apply for a merchant cash advance when your credit card payment history is more established. In this way, you’ll stand a better chance of getting approved or obtaining favourable repayment terms.

Beware of falling into a debt trap

Merchant cash advance carries hefty fees and charges, and depending on the fees and how long it takes for the debt to be paid off, businesses may wind up paying annual percentage rates (APR) that go up to a three-figure sum. Things can quickly spiral out of control if business owners aren’t able to keep up with the payments - and often, they may end up taking out multiple cash advances in succession in order to pay off the outstanding balance on previous advances.

Entrepreneur Joe Ruvacalba is a case in point. In a CNN Business article, Ruvacalba elaborates on how he had taken out five cash advances for his plumbing company at a point in time and was making daily repayments that amounted to about $5,000. He advises: “As an owner, you have to ask yourself: 'Can I handle this payment every day?' And if you can't, don't get it.“

Explore Other Small Business Financing Options

Merchant cash advances may have been one of the few options for small business owners who don’t qualify for traditional loans in the past. But with the rise of alternative lenders, small business owners now have a wider variety of external financing solutions to choose from - including short term loans, invoice financing and lines of credit.

With Aspire, loan application processes are convenient, streamlined and speedy - submitting an application takes a matter of minutes, and you’ll be notified of your loan approval status in just 24 hours.

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About the author
Marissa Saini
is a seasoned writer and an avid trendspotter across business finance, personal finance, travel and lifestyle industries. With writing history at SingSaver, INK, and ohmyhome, Marissa leverages her broad range of experiences to simplify finance and make readers financially savvy.
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