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?
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.
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:
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.
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:
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.“
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.