The economic conditions of the last decade have made it very difficult for small business owners to get bank financing. When they need money with which to build their businesses, these individuals often cannot get approved for a loan or line of credit from their banks or credit unions.
Rather than let their businesses go under or wait to expand their businesses until they make more profits, they can get the financing they need by taking out a merchant cash advance against a portion of their future credit card receipts. As they contemplate whether or not this option is right for them, they can be persuaded by realizing these five key benefits of a merchant cash advance.
Credit Risk Is Minimal
Merchant cash advances do not require that a business owner go through an extensive credit check. In fact, because the advance is based on predicted credit card sales, the transaction is not a loan, but rather an advancement of a portion of those expected sales amounts.
With that, an MCA company will not need to check the credit of the business owner because in essence this person's credit rating will not matter. The company will claim a portion of those future sales and not require regular payments as a bank or credit union would.
No Required Collateral
Other than the credit card sales, no collateral is needed for this financing. Many small business owners lose their assets because they put these possessions up against their bank loans. If they default on the loans, the bank can claim those assets, leaving the owners with nothing left to back their businesses.
However, with a merchant cash advance, owners do not have to use their assets as a means of securing the advance. The company that extends this financing only is interested in the predicted future credit card sales, not the business' building, the owner's home, or other valuable assets.
High Approval Rating
Banks and credit unions are notoriously tight-fisted when it comes to extending loans. Applicants have to have exceptionally high credit ratings and typically have been in business a long time before one of these institutions will extend a line of credit to them. People who are just starting a business or have somewhat less than perfect credit often are turned down for a loan.
However, because a merchant cash advance is based on future credit card sales and not a person's credit rating, the approval rate for these types of transactions tends to be much higher than a bank's loan approval rate. When people apply for an MCA, they can generally expect to be approved, unless they have a detriment like an open bankruptcy or delinquent federal taxes working against them. If they have no such barrier, people may expect to be approved for the financing they need.
Freedom to Utilize Money for Businesses
A merchant cash advance comes with few, if any restrictions for which the money can be used. A bank, for example, may require a person to use the cash in a certain way, such as to buy equipment or make payroll. However, a merchant cash advance can be used as a business owner sees fit. Some of the more common uses include:
- Expanding the client base
- Venturing into new markets
- Making payroll or paying company bills
- Buying equipment
- Investing in real estate or the stock market
The money is the owner's to do with as he or she pleases. This person does not have to account to the advancement company for its use.
Some people fear that a merchant cash advance will be too expensive. However, in reality this transaction is based on money that the business is expected to make. The MCA company simply acquires a portion of those expected sales at a discount, making it possible for the client to repay the advance once those sales are received.
This affordability allows business owners to remain viable without having to cripple their budgets with expensive loan payments. Unlike loans, which may not be based on a company's actual revenue, a merchant cash advance reflects the amount of money a business takes in each month or year. It can be adjusted as needed, allowing owners to seek higher advance amounts during prosperous times and take out less when their businesses are experiencing periodic dips in revenue.
It is little secret that banks and credit unions are less than eager to extend loans. Business owners often have little recourse when they restrict their financing options to bank loans and lines of credit.
However, when they want to remain viable without having to wait for their profits to catch up with their current business needs, these individuals can take out a merchant cash advance. This transaction is based on their future credit card sales and does not require credit approval or collateral.