A business cash advance (sometimes referred to as a merchant cash advance) is a quick and easy way to secure funding. It enables you to borrow money upfront and then repay it using sales from credit and debit cards. Unlike other forms of funding, these have lower minimum requirements and is accessible to more businesses. However, it’s important to know how they work and what costs are involved before diving in. Making a decision without having all the information may mean missing out on the best deal. In this article, we explore how cash advances work and what to look out for when comparing them.
What Is A Cash Advance?
A cash advance is where your business is provided with funds which are leveraged against future sales. It’s a bit different from a loan or line of credit in that you don’t borrow the money. Instead, you exchange a proportion of your predicted card sales for some upfront cash. In order to repay the advance, the lender will take a percentage from monthly sales that are paid for by credit or debit card. This is done automatically for every card payment so that you don’t need to worry about lump sum loan payments. They are ideal for businesses that don’t have collateral or a long trading history and therefore aren’t yet eligible for a loan.
Pros & Cons
As with any type of business funding, there are advantages and drawbacks. A cash advance may not be the best solution for every type of company so it’s important to do your research. You may find that a small business loan or invoice factoring are more cost-effective options depending on your circumstances. The benefits of a business cash advance are:
- You’ll receive the funds quickly so that you can put them to good use almost immediately
- The applicant requirements aren’t as strict as other funding types so the approval process is much easier
- The funds can be used for a variety of different business purposes so you aren’t as restricted as other forms of lending
- Companies with poor business credit history are able to take advantage of cash advances as long as they generate card sales
However, the cash advance option does also have some drawbacks that need to be considered:
- The fees are usually higher than traditional business loans which makes them more expensive overall
- Once you commit to a merchant cash advance provider, it can be difficult to switch so you need to be confident in your choice
- Repayments are taken automatically from card payments which can decrease cash flow
Weighing up the pros and cons of a cash advance will enable you to make the best decision for your business needs. It’s worth doing some research into the options before committing to this type of funding or a specific merchant. This will minimize the likelihood of making a hasty decision that isn’t in your business’ best interest long-term.
What Type of Businesses Can Qualify for Cash Advances?
The good news is that it’s easier to qualify for a business cash advance than other types of lending. This can make it a practical option for businesses that find it difficult to secure funding due to their history or circumstances. This includes factors such as:
- Not having any collateral
- Having a limited business trading history
- Low credit rating (business or personal)
If any of these apply to your business, then a cash advance may be the ideal solution. The minimum eligibility standards aren’t as strict as other borrowing options, so most businesses should be able to secure one.
Cash advance business funding can also be a good choice for companies that make most of their revenue through card payments. These tend to be B2C (business to consumer) organizations since people way with their personal debit or credit card. Restaurants, retail stores, beauty salons, auto repair shops, and online merchants usually generate their revenue in this way. Because the advance is repaid using credit card transactions, it allows you to borrow the funds and pay them off quickly. This isn’t the case for B2B (business to business) companies that generate their revenue through invoicing. For these types of business, invoice factoring may be a more suitable alternative.
How Long Does It Take?
You can receive the cash in as little as one day. It’s a much faster funding option than business loans, equipment leases, or credit card applications. You can speed up the process by having your driving license, bank statements, tax documents, and credit card processing statements to hand. Your funder may request other forms of ID or supporting evidence but these are the fundamentals.
How Does It Work?
A business cash advance is where you borrow a sum of cash and secure it against future card sales. The funding provider or ‘merchant’ will give you access to the cash quickly – sometimes you’ll receive it within 24 hours. They will then take a proportion of every sale you make that’s paid for by credit or debit card. This percentage is used to pay back the cost of the advance plus additional fees.
As part of the application process, the lender will want to assess the annual revenue you generate from card sales. This is to give them a sense of how much your income is and how much you’ll be able to pay back using card-generated revenue. You don’t need to have all your products or services paid for by card, it’s fine to have some from cash or invoicing too.
The repayment process is completely automated so you don’t have to worry about remembering to make monthly payments by set deadlines. The money will be taken from payments without you needing to lift a finger. A percentage of your sales will be remitted through automated clearing house (ACH) withdrawals. Your merchant cash provider will connect directly to your bank account or device used for credit card processing. This means that you can focus on other, more important aspects of your business safe in the knowledge that the money is being paid off.
How Much Can You Borrow?
Depending on your circumstances, you may be able to get a cash advance of between $2000 and $1,000,000. In order to qualify for an advance with Strategic Capital, you’ll need to meet our minimum criteria:
- 6 Months in Business
- 500 Personal Credit Score
- $10,000 in Monthly Revenue
You’ll also need to provide a completed application form and the previous four months’ worth of bank statements. You may also be asked for four months of card processing statements too.
What Does It Cost?
Cash advances involve an additional fee instead of the traditional interest model. This is sometimes referred to as the ‘factor rate’. Cash advance companies usually charge a rate somewhere between 1.12 and 1.5 which is used as a multiple. In order to calculate the total amount you’ll repay, simply multiply the amount you want to be advanced by the factor rate. For example, if you’re looking for a cash advance of $10,000 and the factor rate is 1.2, then you’ll repay $12,000 in total ($10,000 x 1.2).
If you convert this to an APR, it can be in the double digits. This can make it a more expensive form of borrowing that business loans which tend to have single-digit interest rates. However, it’s not just the factor rate or interest fee that you need to take into account. Cash advances may not have a fixed repayment term like loans do, which means you may be able to pay it off at a faster or slower rate. This may make it a more attractive and flexible funding alternative to a fixed loan in some cases.
How Long Will I Have To Pay It Off?
On average, it takes a business 8-9 months to repay a merchant cash advance. However, terms can vary from four months at the short end to 18-months at the longer end. It’s usually the case that shorter-term advances have a higher factor rate which can affect your cash flow situation. As with all forms of financial planning, it’s important to model different scenarios to work out which is right for you. Use a calculator to work out the total cost to your business. It’s also worth comparing all your options using a site like Kabbage.
Merchant advances are a quick and easy form of business funding. They have lower minimum qualification requirements which means they are accessible to a wider range of businesses. Because repayments are made directly from your card sales, you don’t need to worry about payment deadlines. Everything is taken care of automatically which makes them a hassle-free alternative to loans. They are also much quicker sources of financing than national funding (NF) programs like SBA loans. Be sure to read the terms and conditions text carefully so that you know what you’re committing to. Not all funders will act in your best interest so choose a partner that has the same values that your business does. Online lenders like Strategic Capital tend to have a more forward-thinking approach than traditional banks. So, if you’ve had bad experiences in the past, you may find our financial services refreshing.
Business Finance From Strategic Capital
Strategic Capital provides business cash advances to a wide range of companies across the USA. Whether it’s to pay for your everyday costs, emergency repairs to equipment, or investing in expansion, we offer small business finance solutions without the hassle of traditional banks. Best of all, you’ll benefit from competitive terms and a simple application process, so you’ll soon have more money to reinvest into your business.
Transparency, innovation, and expertise are the driving factors behind everything we do. With a talented team of advisors, a plethora of funding partners, and the best technology available – we go above and beyond to help our clients receive their capital rapidly with the industry’s most competitive repayment options and interest rates. We want to break speed records, not bank accounts. Upon submitting your application, it’s reviewed by a dedicated Capital Advisor. We generate the best rates and terms at lightning speed through our funding matrix and robust lender network. Yep… it’s that simple.
Learn more about our cash advances, equipment lease products, and other business lending services here.
Checking for pre-approval will not affect your credit score.