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The Ultimate Pros and Cons of Merchant Cash Advances for Startups & Small Business

A business emergency can be unavoidable, but with careful planning, you can make sure not to run out of money. This careful financial planning for the business emergency requires you to have an in depth knowledge of emergency small business loans, so you can rightly select the right one when needed.

Merchant Cash Advances for Startups & Small Business

This article will discuss Merchant Cash Advance (MCA) Loan in detail to help you know when you should get this loan and when not.

A Merchant Cash Advance Loan is probably the quickest source of short-term financing for a small business merchant to meet any kind of cash emergency. Mostly, the Merchant Cash Advance loans are Principal + Fees to be repaid within 6 to 12 months.

merchant cash advance

General Requirements for Merchant Cash Advances:

  • The primary requirement is you must make daily credit card transactions (which is why they are merchant cash advances).
  • These loans are normally for the retail, restaurant, and service companies, so apply only if you fall in the relevant industry.
  • Minimum $2,500 to $5,000 monthly credit card billings, possibly higher depending on the amount of the advance.
  • Proof of at least four months of history of credit card sales.

Advantages of Using Merchant Cash Advances

The Merchant Cash Advances have their own unique benefits, for instance:

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  • They are quickest, i.e. advances are typically made within 24 to 48 hours.
  • Minimal paperwork required.
  • Unlike a bank loan, there is no fixed monthly payment, no interest rate or pay off date.
  • There is no collateral requirement, i.e. if you fail to pay in the specified time, your assets are not at risk.
  • In case if a merchant’s business fails and the cash advance is not fully repaid, there is no legal liability.
  • Repayment is automatic from merchant’s credit card transactions.
  • Since the repayment is direct, there’s no possibility of late charges from overlooked due dates that frequently occur with bank cash loans.
  • Better cash flow in case of lower sales volume, the MCA Company collects only a set percentage of monthly sales, without any minimum amount required.

Disadvantages of Using Merchant Cash Advances

Like any other type of business loan, Merchant Cash Advances also have some drawbacks or disadvantages. For instance:

  • These loans are considerably more costly than traditional financing.
  • Though they are called “interest-free”, if you compare the percentage of your future sales with the market rate, you find that you are paying significantly higher.
  • Technically, these are not considered as “loans”, rather, purchase on the sale of future income.
  • The cash advance contracts prohibit switching credit card processors, so in case if you want to switch, you cannot do so until the contract ends.
  • You might be thinking of encouraging your customers to pay in cash, which is considered a”breach of contract” and could result in a legal penalty.

The Bottom Line

With an MCA, a merchant capital company advances you a lump sum of capital for your business emergency requirements and you agree on a set percentage that the lender can take from your credit card sales each day. So, you are actually paying that company back by offering a slice of your business’s daily credit card sales.

If you’re in extreme emergency and cannot wait for the bank loan approval or cannot find funding from friends and family, you should certainly go for an MCA, but only if you can afford to give away a revenue share on daily basis.

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