Examining the Pros and Cons of Merchant Cash Advances

Small businesses often need alternative means of financing. However, traditional lenders like banks and credit unions tend to decline small companies in need of loans. Fortunately, options like merchant cash advances are convenient alternatives to established business loans. 

Knowing the pros and cons of merchant cash advances can help business owners decide about this unique type of financing. A merchant gives the business a lump sum with the expectation that the owner will repay it with credit and debit card purchases.

Read on to learn about the pros and cons of merchant cash advances in business ownership.

Pro: The cash advance is not a loan

The merchant cash advance is not a loan. Instead, it’s a sale of future revenue. Because the financial benefit isn’t a loan, merchants and small business owners using the funds don’t have to jump through the several hoops needed for traditional loans

Con: The cash advance will not help your credit score

Because the merchant doesn’t report payments to credit bureaus, the cash advance won’t help your credit score. On the flip side, it won’t hurt your credit if you struggle to make timely payments. 

Pro: Small businesses only pay when they make credit card sales

Companies only pay back the merchant cash advance when they make credit or debit card sales. The merchant takes a percentage from each sale, putting the payment toward the amount owed. Unlike traditional loans, which involve installment payments, this practical option removes some financial risks. 

Though credit card sales will speed up or slow down depending on the business’s profitability, merchants understand the process and often evaluate previous sales before awarding a cash advance. 

Con: Your cash advance might have a hefty fee attached to it

Cash advances are popular because borrowers get their money quickly without completing lengthy applications. However, convenience often comes with a price. So, though you may receive your cash quickly, it may be accompanied by more considerable fees.

Because the merchant takes payments directly from your credit card sales, tracking your quick cash infusion may be challenging. To avoid costly mistakes, read agreement details before committing to a cash advance, and look for those with the lowest fees. 

Pro: You can get a cash advance even if you have a low credit score

Merchant cash advances level the playing field for small businesses that need quick financing, allowing fresh-faced companies with low credit to fund payroll, new equipment, and inventory. Plus, merchants can see your credit card sales and financial data, so they don’t need to take weeks to approve you. 

Con: Don’t get too many cash advances at once

Because cash advances are more straightforward and easy to approve, many companies feel tempted to obtain several at once. To bypass debt and late fees, pay attention to your finances, so you don’t overextend yourself and struggle to pay back what you owe. 

Wrap up

Merchant cash advances can be a helpful short-term solution for businesses that need quick cash. Just make sure you review the details before you sign for an advance.

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