Merchants are in a familiar situation. They need to provide products and services, but they don’t have any cash on hand. Worse yet, they can’t get any – there’s not enough profit in the company to earn more than minimum wage, let alone hold onto a little extra for unforeseen expenses. What do you do? One option is the merchant cash advance, an advance on income that a merchant receives from their customers. As soon as they pay off the loan, this money returns to them and enables them to keep doing what they’re doing!
What Is A Merchant Cash Advance?
Businesses with immediate requirements may benefit from a sort of short-term financing known as merchant cash advances, such as purchasing inventory or making payroll. Banks and other lending institutions typically offer these loans, and the interest rate is usually meager. To qualify for merchant cash advances, the business must be in good standing with its bank and meet specific financial requirements. The loan amount generally ranges from $1,000 to $25,000, and the term is typically two weeks or less. Once the loan is approved, the business will receive a loan commitment letter from the lender.
The letter will list all of the terms and conditions of the advance, including the interest rate and payment schedule. Businesses should contact their bank or lending institution to see their eligibility for a loan. After determining if you’re eligible for a loan, you’ll need to provide your bank with documentation proving your business is in good standing and meets financial requirements. It can include your profit and loss statement, current credit score rating, business license information, etc. Once your bank has the required information, it will likely approve you for a merchant cash advance.
The best part? Merchant cash advances are usually available in minutes, and most lenders offer flexible repayment options. Plus, since the proceeds from these loans aren’t returned to the lender until the merchant has repaid the entire loan amount, there’s no need to worry about late payments or missed payment penalties. So what’s not to love about merchant cash advances? For one thing, they’re not always available at an affordable rate. But if you can find a lender that offers competitive rates and flexible repayment terms, merchant cash advances could be the perfect solution for your business needs.
Processing A Merchant Cash Advance
A merchant cash advance comes with higher interest rates than typical credit card rates, but they’re more affordable because the repayment plan is typically over a shorter period. When you apply for it from your bank, you’ll need to provide documentation that shows your business has access to funds and that you can repay the loan promptly. Your bank may also require you to sign a promissory note or collateral agreement. To get approved, your business will likely need to meet specific eligibility requirements. These requirements vary depending on the bank, but your business will typically need an active checking account and be in good financial standing.
Once approved, your bank will take around 10 days to process the application and approve the loan. After completing this process, your bank will send you an invoice outlining the loan terms and how much money you’ll be borrowing. You’ll then have a month to repay the loan in complete using either a certified check or electronic funds transfer (EFT). If you can’t pay back the loan in full within 30 days, your bank may decide to cancel the debt and seize it. When processing a merchant cash advance:
- Make sure you have enough liquidity – Having enough money available to cover your expenses right now is vital since you won’t be able to withdraw the money from the loan until it’s repaid. Ensure you have adequate money set aside so you can quickly pay for any unforeseen expenses that arise.
- Be mindful of high-interest rates – Merchant cash advances often have high-interest rates, so make sure you’re aware before applying.
- Check your credit score – Before applying for a merchant cash advance, it’s essential to check your credit score. If your score isn’t good enough, lenders may not offer you a loan or may require an increased down payment or other collateral.
The Pros And Cons Worth Considering
The main pros of merchant cash advances include the following:
- Merchant cash advances are swift and easy to apply for. Most financial institutions will process applications within minutes, and most loans can approve within hours. It makes merchant cash advances an excellent option for small businesses that need money quickly but cannot take out a traditional loan.
- Merchant cash advances often have meager interest rates. Businesses can often borrow more than they would get from a traditional loan without paying high-interest rates.
- Finally, merchant cash advances can be beneficial when it comes to preventing business bankruptcy. Because these loans are short-term, they don’t typically lead to massive debt payments that could push a company over the edge.
The main cons of merchant cash advances include the following:
- Merchant cash advances are often expensive compared to other forms of financing, especially when compared to bank loans.
- Merchants may be reluctant to take out a merchant cash advance if they don’t have enough liquidity in their account or are not confident they’ll be able to pay back the debt promptly.
- The loan terms are usually very short-term, usually lasting just a few weeks.
- There is no way to get your money back if you cannot repay the loan on time.
Conclusion
Merchant cash advances are short-term loans businesses can use to cover temporary financial needs. They often cover expenses like inventory, marketing, and employee wages. Merchant cash advances are offered by various lenders and can be expensive. Before taking out a merchant cash advance, ensure you understand the terms and conditions.
