Is a Merchant Cash Advance Right For You: 10 Detailed Pros and Cons of Merchant Cash Advances

Broke? Business going downhill? Bills to the ceiling and feeling a bit overwhelmed? Well, merchant cash advances may just be right for you.

A merchant cash advance (MCA) is a method of receiving money for your business without applying for a traditional business loan. Good credit, bad credit, it doesn’t matter, so expect the funds to hit your account immediately once approved. Sounds perfect, right? Well, like all things, that depends.

Today, we’ll be showing you a few opportunities and obstacles you may face while getting this particular cash advance to help you figure out whether it’s right for you.

What is a Merchant Cash Advance?

A merchant cash advance is a type of funding for small businesses (aka “merchants”) that accept credit/debit card payments from their customers. After a small business applies and is approved for this advance, it can receive advances from merchant cash advance companies (e.g. Greenbox Capital, Rapid Finance, and OnDeck).

The merchant then has the option of repaying the credit in two ways: with the merchant’s consent, the advance company can take a percent of the merchant’s credit and debit card profits daily. Or, the company can withdraw funds from the merchant’s bank account on an agreed-upon schedule until the credit is repaid.

Cons

We’ll first start with the cons of merchant cash advances to help speed up your decision.

May Hurt Your Credit Score

You may think you got lucky by qualifying for this cash advance despite your less than stellar credit score; however, you may wish you didn’t once you check your score the next day. MCAs usually requires a background credit check, so if the inquiry results in a hard credit check, it may hurt your score.

No Federal Regulations

MCAs were created as commercial transactions, so they’re largely unregulated. Due to the lack of regulations, many lenders charge hefty interest fees.

So in the game of MCAs, nobody is looking out for you.

Loss of Autonomy Over Your Business

Although MCAs don’t use the same usury laws as other small business loans, some MCA lenders require business owners to agree to operate under their guidelines. For instance, they may authorize borrowers to give up vacation time until the loan is repaid.

Not Intended for New Businesses

Merchant cash advances are great for business owners who have on average $5,000 in credit card sales and have been running for at least 6 months. For instance, according to Nav, an app that helps business owners leverage and manage their financials, “businesses with $4,500 in monthly credit card sales and six months in business” can qualify for their merchant cash advance.

Thus, these cash advances aren’t intended for entrepreneurs who hope to use this advance to start their businesses.

Short-Term Solution That May Result In a Lengthy Issue

Most business owners are wary of merchant cash advances because of their notoriously high annual percentage rates (APRs). With annual borrowing cost and fees and interest included, expect to pay off around 40% to 350% depending on the lender, additional fees, amount of advance, how long it takes to pay off, and strength of business credit card payment history.

Paying off this loan may just worsen the financial position that your business is in by feeding your daily profits to advance companies and potentially putting your business into further debt.

However, just because cash advances aren’t right for you does not mean there aren’t alternatives. Check out our listicle on business loans for people with bad credit, and you might find just what you to need.

Pros

If you’re still here after reading through all the negatives of cash advances, then it may be the solution to all of your problems. To help you know for sure, here are all the great qualities of this short-term loan.

Qualify Even With Bad Credit

If you’ve been denied by every lender you can think of and have no other reasonable options, an MCA may be your saving grace. Credit requirements are pretty lenient with these types of advances, with many companies approving merchants with scores as low as 600.

Quick Access

Unlike a traditional loan, the turnaround time for merchant cash advances on average is 24-48 hours, so expect to receive the funds that your business needs almost immediately.

(Tip: For the application, you’ll need a few months’ worths of credit and bank statements, so gather those in preparation.)

Physical Collateral Isn’t Required

Quite a few small business funding companies require merchants to put up some sort of collateral, whether property or equipment, in the off chance that merchants can’t repay the loan.

However, MCAs allows small businesses to receive the funding they need without worrying about losing their prized possessions if things go downhill.

Flexible Repayment Options

As mentioned previously, merchant cash advances give a borrower the decision between when and how to repay their debt. While, at the same time, the repayment structure of these “loans” gives further breathing room to a merchant since it’s based upon the success of their business.

The repayment period usually last 3-12 months, so the more credit card sales a merchant has, the faster their debt will be repaid.

Avoid Firing Honest Employees

Nobody likes to fire a dedicated, well-to-do employee, and with an MCA, a small business owner won’t be forced to let go of any of their salespeople, customer service agents, etc. due to limited funds.