Merchant Cash Advance: How it Can Help Your Business

Posted by Factor Funding Co. on January 20, 2012

Are you a small business owner who needs access to capital right away? Have you been turned down for a traditional business loan from a financial institution? If so, you might be considering taking a merchant cash advance. This option allows business owners to get a cash advance on their future sales even if they don't have a good credit history. This unique provision poses its own risks so it's wise for business owners to find out how merchant cash advances work before agreeing to a plan.

About Merchant Cash Advances

Merchant cash advances are upfront loans that are guaranteed by future store sales. For example, if you take a merchant cash advance from a lender you'll receive immediate cash and you'll repay the loan by forfeiting a percentage of your future sales until the loan is repaid. Most merchant cash advance lenders agree to fluctuating percentage rates that rise when your store sales go up and fall when your store sales go down.

Weighing High Interest Rates

A key concern for those considering a merchant cash advance is the high interest rate on the funds. Merchant lenders can charge anywhere from 60 to 200 percent APR on a cash advance which is far more than a bank or a credit card company could ever charge on a loan or an account. In effect, these lenders operate in a manner similar to payday loan companies, in that they offer immediate funds with very high interest rates to those who have insufficient credit. The reason that merchant cash advance lenders are able to charge such high rates is that the funds are not technically loans. Rather, they're considered advances on future earnings and, as such, they're not included in the federal laws against usury.

Deciding If a Merchant Cash Advance is Right for You

If you're considering a merchant cash advance, make sure that you have exhausted all of your other options before you apply. Since a cash advance can cost so much money in the long run many business owners prefer to use this method as a last resort when they're in serious need of working capital. Speak with several different lenders and inquire about their interest rates and the applicable repayment schedule. If the company is unwilling to negotiate your repayment percentage when your company goes through a slow period you might want to continue shopping around until you find one that will.

Merchant cash advances can be very useful to companies that need immediate cash flow and are able to repay the funds quickly. If you take the time to find a reputable small business funding company and consider your business sales forecast before applying for the funds you can use a merchant cash advance to your advantage.

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