For a business on its last leg, a merchant cash advance (MCA) might appear as an enticing source of cash.
However, before making such a critical decision, business owners should consider the high costs of merchant cash advances, especially compared to more traditional options such as small business loans, business credit cards, traditional bank loans, or a business line of credit.
If you’re thinking about applying for a merchant cash advance, here are some things to keep in mind:
- The APR on a merchant cash advance is typically higher than the APR on a traditional loan. However, the repayment terms are also more flexible
- The amount you can borrow depends on the strength of your business’s credit card and debit card sales.
- If you’re thinking about applying for a merchant cash advance, it’s important to shop around and compare interest rates and repayment terms.
Are Merchant Cash Advances A Good Idea?
Merchant cash advances can be a good idea for businesses that need short-term financing and have strong credit card and debit card sales. However, the APR on an MCA is typically higher than the APR on a traditional loan, so it’s important to shop around and compare interest rates and repayment terms.
If you’re thinking about applying for an MCA, it’s important to be aware of the risks involved. There is no guarantee that your business will be approved for an MCA, and if you are approved, you may end up paying more in interest and fees than you originally anticipated.
It’s also important to remember that merchant cash advances are not a long-term solution. The repayment terms are flexible, but the loan must be repaid within a certain amount of time.
The Pros And Cons Of Merchant Cash Advances
Merchant cash advances can be a helpful source of financing for small businesses, but they also come with a few risks. Here are the pros and cons of merchant cash advances:
Pros
- Merchant cash advances are relatively easy to obtain. You don’t need a good credit score to qualify, and the approval process is quick.
- The repayment terms are flexible. You can choose to repay the advance through a fixed amount of future credit and debit card sales, or you can pay back the advance over time.
- The amount you can borrow depends on your business’s credit and debit card sales volume.
Cons
- The APR on a merchant cash advance is typically higher than the APR on a traditional loan.
- You are required to repay the advance within a certain amount of time.
- There is no guarantee that your business will be approved for an MCA.
- If you are approved, you may end up paying more in interest and fees than you originally anticipated.
Merchant cash advances can be a helpful source of financing for small businesses, but they also come with a few risks. Before you decide if an MCA is right for your business, be sure to weigh the pros and cons.
Merchant Cash Advances Vs. Other Forms Of Financing
When you’re looking for short-term financing, it’s important to weigh all your options. Here’s a comparison of merchant cash advances to other common forms of financing:
Merchant Cash Advance
- Easy to obtain, no credit score required, and borrowers with bad credit are accepted
- Flexible repayment terms based on daily credit card sales
- Factor rate (essentially the interest rate) is based on the repayment risk
- The advance amount you can borrow depends on your business’s credit and debit card sales volume
Small Business Loan
- Requires a good credit score to qualify
- Collateral and a personal guarantee from the owner will be required to secure the loan
- Fixed repayment terms
- Amount you can borrow depends on the lender’s requirements
Line Of Credit
- Requires a good credit score to qualify
- Flexible repayment terms
- Amount you can borrow depends on the lender’s requirements
Also see: What is a line of credit?
Credit Card
- Requires a good credit score to qualify
- Fixed repayment terms
- Amount you can borrow depends on the cardholder’s credit limit
Are Merchant Cash Advances A Good Idea?
Merchant cash advances can be a good idea for businesses that need short-term financing and have strong credit card and debit card sales. However, the APR on an MCA is typically higher than the APR on a traditional loan, so it’s important to shop around and compare interest rates and repayment terms.
If you’re thinking about applying with an MCA provider, it’s important to be aware of the risks involved. There is no guarantee that your business will be approved for an MCA, and if you are approved, you may end up paying more in interest and fees than you originally anticipated, which could further strain the cash flow of your business.
It’s also important to remember that merchant cash advances are not a long-term solution. The repayment terms are flexible, but the loan must be repaid within a certain amount of time.
If you’re looking for a short-term financing option that is easy to obtain and has flexible repayment terms, a merchant cash advance may be the right choice for you. However, it’s important to be aware of the risks involved and to shop around for the best interest rates and repayment terms.