A merchant cash advance is a source of upfront capital in exchange for a percentage of your business’s future credit card transactions. Companies that provide merchant cash advances typically partner with credit card companies to hold back a percentage of a business’s credit card revenue to ensure that the advance is paid back in full.
Merchant cash advances are different from small business loans in that your business is selling your future income in exchange for working capital that you can use immediately. While a small business loan involves collecting regular payments until the advance is paid in full, a merchant cash advance company will automatically deduct a small amount of your credit card sales to cover the advance. This means that your business won’t be paying back the advance from any other sources; it will all come from your credit card sales.
Merchant cash advance companies also calculate risk differently than those who provide traditional small business loans. They will take your business’s credit score into account. But the risk assessment is taken from your credit card sales through a merchant account and the length of time you’ve been in business. Many merchant cash advances have high annual percentage rates and are often more expensive than other small business loans.
Is a Merchant Cash Advance Right for Your Business?
Even though interest rates for merchant cash advances can be as high as 38 percent, they can still benefit your business. Especially if you have too little credit or a less-than-ideal credit score. You don’t pay back the advance unless you make credit card sales. So you won’t have to worry about making regular payments as long as you have enough credit card transactions.
Keep in mind that you still need to qualify for a merchant cash advance. While that is a little easier than qualifying for other small business loans, lenders may not provide an advance if you’ve been in business for less than a year or if you have a prior bankruptcy on file. You also may not qualify if your business doesn’t process enough regular credit card sales.
To learn more about merchant cash advances and find out if it is right for your business, contact Sterling Capital Consulting today!