One of the biggest challenges when starting up a new company is getting a handle on the cash flow and financing that you need to guarantee smooth and continuous operations while you build up your volume of business. Even when an entrepreneur is fairly experienced, moving into a new industry where companies operate on a new cycle can throw off your expectations, making it important to know the ins and outs of the options that are available to you. For companies that do a large volume of their sales through credit card transactions, merchant cash advances (or MCAs) are a great tool to have ready and on hand.
The first thing to know about merchant advances is that they do not count as debt in the same way that traditional loans do. While a lender may review your credit history as one aspect of the approval process, your advance won’t hinge on it the same way that traditional loans might. Instead, the main factor in determining whether or not to lend the money will come from a review of your volume of credit card transactions. The more business you do that way, the larger the advance you can qualify for.
That leads to the second major feature of MCAs that you need to be aware of: They do not have set payment amounts. Instead, they are indexed to your sales, meaning that you will pay a percentage of your credit card sales to the lender until the advance has been repaid, along with any fees or interest that might need to be assessed. Typically, this is managed by having the lender receive your credit card payments during repayment, allowing them to deduct their percentage before passing the remainder on.
There are a few other features that merchant cash advances bring to the table and that you generally won’t find in traditional loans. For instance, MCAs do not depend on collateral, and they are generally very low-risk for the borrower and lender both, even if their repayment term has to fluctuate a bit. They also provide faster turn-around for approval and disbursement, leading them to be useful in a variety of situations where traditional loans would not be accessible until after the need for them has passed. Merchant cash advances are not totally risk-free, however, and a change from credit-based transactions to cash transactions can also complicate their repayment. These risks are relatively minor, though, in comparison with some of the alternatives. This means that for the right company, they can be the best possible option.