Merchant Cash Advance Financing Benefits
Merchant cash advance financing benefits for a small business will vary by the type of business, the cash flow issue to resolve, its financial history and the alternative financing options available to it. A merchant cash advance can be a viable solution for new, less established small businesses with a need of rapid working capital that have limited collateral or poor credit history and which do not fit the ideal profile for a traditional business loan. With access to rapid working capital, a small business can use the cash in its daily operations to move forward and continue to grow.
A merchant cash advance is an agreement where the financial lender is purchasing a portion of the business’ future credit card sales at a discount. It is not like a traditional bank loan with set payment terms, duration and interest rate. Rather, while the merchant cash advance lender purchases the right to retrieve a portion of the business’ daily credit card sales (which will normally vary, up or down), the business is able to receive a lump sum of cash which is paid (advanced) at the outset of the agreement.
Let’s review a variety of merchant cash advance financing benefits and see if it is right for your business situation:
Resolve Short-Term Cash Flow Issues
One of the primary merchant cash advance financing benefits is to resolve a short-term cash flow issue. Small businesses often experience a shortage of capital that, left unresolved, can create a major issue or hold back the growth of the company. This shortage of capital can result from a multitude of reasons such as delayed invoice payments by a key client, unplanned equipment purchase or initial investments required to support bringing on a new business. Since the business owner knows the source and approximately when the anticipated funds will be received, a merchant cash advance serves as a “bridge” to when the business payday happens. The key factor is that merchant cash advance financing provides rapid access to capital, normally in a week’s time.
Flexible Repayment Structure
A highly flexible repayment structure also is among the merchant cash advance financing benefits since it provides a small business great flexibility to manage its cash flow payments. Your repayment of the merchant cash advance sum is based on a daily percentage of the credit card invoicing, which will vary (up or down) based on the business’ activity. During slow business sales periods, the repayment amounts will drop and conversely during high sales periods, the repayment amounts will increase. You can view this as leveraging your future revenue-based credit card collections.
This is very different from a traditional business loan, where the financial agreement has normally a monthly fixed repayment structure for a specific term length and is independent of your business sales activity. Since the repayment amount is not related to the amount of revenue your business generates, during slow sales periods this payment obligation can hurt your business’ cash flow, profitability and restrict taking advantage of new business opportunities.
Flexibility In How Capital Is Used
Traditional small business loans generally restrict how the capital will be used by the business, normally as some type of physical asset purchase. This is intended to reduce risk to the lender and often serves as a form of loan collateral. As an example, SBA microloans cannot be used to pay off debt or purchase real estate. This restricted use of financing does not serve all small business needs.
In contrast, merchant cash advance financing does not have a dedicated use restriction. When your business receives a lump sum of capital from the lender, you can spend it however is most beneficial for your unique business situation. For example, you may choose use a portion of the capital to pay off debts that are adversely affecting your business financial score, a portion to invest in additional inventory for the anticipated busy season, and the remainder as an emergency reserve.
No Risk To Business Collateral Or Credit Score
Among the merchant cash advance financing benefits is that it is a sales transaction between your small business and the lender, rather than a conventional business loan. Specifically your business is conducting a sales transaction of future credit receivables to a third party for capital, with no commitment and risk of fixed payment schedule. Because of this, a merchant cash advance is not reported on the business’ credit report and does not require assets to be pledge as collateral. Hence, less risk to your business.
Merchant Cash Advance Financing Benefits – Conclusion
Merchant cash advance financing benefits are varied but fundamentally serve to provide rapid working capital to resolve a business cash flow issue. The working capital can be used for a variety of business purposes, offers flexibility of repayment and does not require collateral asset to be pledge. Depending upon your business situation, this financial solution may fit your business needs, now or in the future.
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