Managing cash flow can be a true struggle for small business owners. Depending on the type of business activities you are involved in, your cash flow issues may be the result of slow sales, a regular down season or even a slow accounts receivable pipeline. While cash may be trickling in, bills may be pouring in, and expenses may be mounting. You may be wondering what you can do to get your hands on extra money to make ends meet. The idea of a merchant cash advance can sound enticing, and many small business owners jump at the chance to get their hands on quick cash without hassle. However, the reality is that a merchant cash advance can be expensive, and you should take a closer look at what a merchant account is and what some of the alternatives are before you make a decision about how to manage your business finances.
What Is a Merchant Cash Advance?
Understanding what a merchant cash advance is can help you to make the best overall decision about your business’s cash flow management. A merchant cash advance essentially is a loan against your future merchant account sales. To obtain a merchant cash advance, you typically need to locate a reputable provider to advance you the funds. There is an application process, and during this process, the provider may review your sales activity for the last few months or longer to determine reasonably how much money you can afford to borrow through your cash advance. Basically, you are borrowing money from your future proceeds, and this can create a financial shortfall down the road when you need to pay upcoming bills with that money.
What Is the Cost of a Merchant Cash Advance?
The bottom line is that you need access to extra cash. Your financial needs may be urgent, and you may not have time to wait for a traditional loan application to be processed. Nonetheless, it is important to understand the true cost of a merchant cash advance. Most cash advances are paid back through a daily holdback. Through a holdback, the provider recoups a portion of your daily sales until the loan proceeds plus interest charges and loan fees are paid back in full. A typical holdback amount may be approximately 15 percent of your sales proceeds, and the repayment amount may be between 30 to 40 percent in some cases. You may be more interested to learn what the interest rates charged on a merchant cash advance are. The rates typically vary between 10 to 20 percent, but some rates fall outside of this threshold.
Why Are Merchant Cash Advances a Bad Idea?
As you can see, the cost of a merchant cash advance can be significant. Paying back the proceeds over time can eat away at future profitability, and this can make a currently bad time even more challenging for you to deal with. In addition, there may be more affordable ways to borrow funds that are needed by your business that give you greater ability to manage your finances better without detracting from the daily profitability from your business. For example, with a merchant cash advance, any benefits from very profitable days are eroded because of the percentage-based payment system of a merchant cash advance. With a monthly repayment option from another source, you could enjoy a fixed monthly payment and could more successfully reap the rewards from a very profitable day, week or month.
What Are Alternatives to a Merchant Cash Advance?
There are several alternatives to merchant cash advances. It is important to consider the availability of loan proceeds, the time it takes to obtain the funds, the cost of the loan and other factors. A credit card cash advance is one idea. Some credit card companies offer exceptional advance offers that you can take advantage of. The payment is often a monthly payment that is based on the amount you borrow. You can also apply for a short-term business loan through a bank. While there is a loan application process for this, you may enjoy more reasonable and affordable repayment terms.
Keep in mind that many businesses that are dealing with a cash shortage must pay the bills as well as invest in marketing or advertising to boost sales. Thoroughly explore the options today to find the best financing option available.