Merchant Cash Advances - What and How

Henry Githinji

Henry Githinji

Henry plans to be an entrepreneur with his own financial consultancy firm, specializing in in binary options and stock trading. Henry is a day trader and plans to use the capital he makes to launch his business. He plans to build a portfolio that attracts investors through his trading performance.
Henry Githinji

10 Things To Know About Online Merchant Cash Advances

Your business may sometimes encounter challenges once in awhile. This could be the shortage of cash to buy inventory, pay employees or for expansion. The banks have a long-drawn system before they could grant you a bank loan.The worst thing is, they carry out background checks before they could approve the loan. The process is just too long. You need to look for other better and faster options. This is where the merchant cash advances come in.

1. What is a merchant cash advance
merchant cash advance

merchant cash advance

A merchant cash advance is a financial plan that involves the exchange of a specific amount of money paid to a business with the future credit card and debit card sales. At first, the definition for merchant cash advances was “payment of a large sum of money paid to a business in exchange for an agreed-upon percentage of future credit card and/or debit card sales”. However, the financial sector and institution have undergone a couple of changes and development in the past few years.

The definition of merchant cash advance has changed over the years, especially the “ lump sum” part of the definition. Thus, a merchant cash advance could be an exchange for just a small amount of cash with a small percentage of future credit and debit card sales. This was in view of bringing flexibility to this meaning and indirectly the structure if this financial plan.

Let us break down this financial plan. Let’s say you need an amount of cash to facilitate a business situation. You decided that a merchant cash advance could be the best option for your business. You approach one of the many merchant cash advance companies. The company chosen offers the amount of merchant in exchange for the future credit card or debit card sales.  Thus, you, the merchant walks away with the money, and then for each credit sales or debit sale that your business has, a small amount of the sales goes directly to the merchant cash advance company.

2. Merchant cash advance companies
Merchant cash advance companies

Merchant cash advance companies

A merchant cash advance is one plan that could be used in all types of business situations that involve money. These could range from getting new inventory, hiring new employees or paying salaries. The money, depending on how much it is could also go as far as helping you expand without worrying about getting a loan to do just that.

With its easy approval process, businesses have found this financial plan very helpful. Business owners understand the phrase “time is money” and will take the option that provides them with fast cash.

3. Merchant cash advances are NOT loans

This is one aspect to clarify. Under the law, there are legislations that govern the administration of loans and how loan providers should operate. However, merchant cash advance financing has been exempted from the financial plans category which is under the loans category. This is why.

The providers of this plan argue that they do not offer the cash advance as a loan. Instead, they are exchanging cash for the borrowing business’ future creditor/ and debit cards sales. This is why they cannot be classified in the same category as normal loans.

The interest rates for merchant cash advances cannot be controlled in the same way as normal loans. This leaves a vulnerability which merchant cash advance providers use to their advantage. The interest rates and very high sometimes, depending on who you approach. The merchant cash advance industry is thus treated as a separate category.

4. Pros of merchant cash advances
Pros of merchant cash advances

Pros of merchant cash advances

This particular financing plan has very intriguing features. Since most people will approach this option for their business as a second option, they set structures put in place that attract as many businesses as possible. The plan, therefore, has a lot of advantages.

As a business owner, you do not have to worry about your credit score when taking out this plan. That is because merchant cash advance companies deal with your business and not your credit score. This means they will only look at the past sales that your business has been making and not your personal financial state is.You and your business are treated as two separate entities. Which is why getting a merchant cash advance is rather easy.

A merchant cash advance doesn’t require collateral. The providers deal with your business and focus on its sales and how much money is being made to determine how much merchant cash advance can be granted to you.

Merchant cash advances are easy to obtain. Their approval rate is very high. Unlike other loans, merchant cash advances can be approved within 24 hours and you can be getting the money in 7-10 days. This is totally different when it comes to the traditional bank loans.

5. Merchant cash advance: disadvantages

There is a flip side of every financial plan out there. A merchant cash advance has a couple of flaws you have to take note of.

First of all, you have to remember that a merchant cash advance is not a loan. The government has always tried to regulate banks, lenders and other financial institutions. They set regulations on interest rates and other factors. But merchant cash advance are not considered loans and so  are not regulated by the legislation`s most of the time. This means that merchant cash advance providers can charge very high- interest rates without any worries. This is a setback for businesses who have to encounter a lot of their sales actually going towards the payment of the advance.

6. The “equilibrium” point of merchant cash advance

This point is geared at bringing a specific point to the table that is at an equilibrium position; it could play as an advantage or a disadvantage, depending on the way you view it.

advantage or a disadvantage

advantage or a disadvantage

The disadvantage

The business, in this case, sells a portion of the future credit or debit card sales to the merchant cash advance providers. This being the reason you cannot contain the money that goes to repay the cash advance. You cannot budget the money that is going out to this plan. First, you must realize that the sales will vary from time to time. This brings forth uncertainty. The only way to determine future sales is by estimations and projections. Even if you have projected future sales, you cannot control that money flowing to the merchant cash advance company. Thus it means that planning out your expenditure for the company and other initiatives could become quite hard.

The advantage

The business will never be in any hurry. The merchant cash provider only gets paid when you make sales. So you don’t have to worry about making payments or being late with payments because the provider has to wait till you make a sale. This puts a business owner in a relaxed situation as you are not worried about any repayment details even of the business is probably facing a shortage of sales.

7.  No collateral

This financial plan needs no collateral. This is because the company is accessed based on the sales it has made previously to determine the amount of merchant cash advance they can be granted. Merchant cash advance providers look at records of sales dating back to a year ago. For this reason, a business doesnt need collateral to be granted the cash advance. This is one of the reasons that make merchant cash advances so attractive to business owners.

8. The companies

The companies involved here offer different kinds of solutions. Their merchant cash advance plans are all different and are tailored to match the needs of the businesses. The most important thing you need to keep in mind when dealing with merchant cash advance providers is the terms and conditions that they put on your cash advance. You have to be keen with the fine print. Thoroughly read through and understand the contract before you sign it to avoid undue stress in the future should problems come up.

9. Fast approval
Fastest Loans

Fastest Loans

Being one of the fastest loans that you can get, a merchant cash advance helps you meet urgent  financial needs in your business. The advance can usually be approved within 24 hours. The cash will be deposited into your business account in 7 days or less. 

10.  In a nutshell

The financial plan is quite a fast and a very attractive way to finance your business. However, you have to be careful and work with the right merchant cash advance provider. You have to research and do your homework before choosing one. Then you have to read the terms and conditions carefully before signing the contract. This ensures that you know what you are getting yourself into.


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