Okay, so you want to start your own business right? And one of the main things you need to support that idea is capital. Now, some of us already have some life savings that can be used for business start-ups while others have to go for the fundraising methods or loans. We all know all the hardships of bank loans – from the changing interest rates to the always coming fees, etc. It isn’t a thing one business owner loves to find himself in, yet sometimes it is a must.
Still, there are businesses that are not eligible for a bank loan – either because those are too small or simply don’t fulfill the needed terms. And what then, where to find capital now? Luckily, there is an option for those small businesses as well, and it called merchant cash advance. A merchant cash advance shouldn’t even be considered a loan (it comes with a much simpler process and less paperwork), allowing the business owner quick cash in the switch for future sales (at a bargain price). Now, merchant cash advance method works the best with small businesses and in the short-term (when there is simply no other way out). Still, you will need to consolidate your income/cost ratio in order to be long-term successful. Anyways, let’s take a look at how does merchant cash advance work and what are the pros and cons of the same!
How Does Merchant Cash Advance Work
As mentioned above you give your future sales in the change for a lump sum of cash. There are two repayment methods – either you sell the credit/debit future sales or get cash by remitting regular debits coming from your account. The second one is more common, and kind of simpler as you are making daily payments/fees until you payout the whole sum. The fees are determined by assessing the risk – the larger the risk you are taking is, the bigger the fees will be (there are multiple MCA calculators online so don’t worry). Anyways, the method is pretty simple, but let’s see what the exact benefits of this are.
All The Pros Of MCA
- First and foremost you get the needed cash in a matter of days. The whole process goes very quickly, and this is especially good when you are catching some deadlines (need to buy new equipment, rent a space, etc.).
- The second benefit is that you can use the merchant cash advance money in any possible way you would like to. While a bank or other types of loans usually set the restriction, making it more difficult to come along, with this method you are pretty flexible. You can use the certain percent to pay back some money that you already loaned, while the remaining cash can be invested in stuff such as new equipment or marketing.
- There is no need to worry about if your credit is impeccable. Here the application process is pretty simple, and it only takes some time to fill in the form. The only thing that you need is the steady amount on your business credit card, and that is it.
- The payment amount depends on how well you do that month. Unlike the bank methods here you don’t have a premade payment amount, but it depends on how much profit you are grossing.
- In the end, you don’t have to worry about risking credit score. There are no worries about your assets being taken away or anything similar.
The Cons Of Merchant Cash Advance
Still, you need to be wary about a few things when entering the merchant cash advance program. First of all, you might be paying a much greater annual percentage rate depending on how successful you are doing and how long does it take to repay the full sum. Also, the MCA contracts can be quite confusing, and it would be wise hiring a lawyer to consult you on how to act in certain situations. And when talking about the law, you have to know that it isn’t regulated by federal principles, so you are not protected. In the end, what is not that great is that you don’t have a benefit of paying off the sum before it was planned (no saved interests).
While merchant cash advance is a good financial support option, it might not be for everyone. Do some more research, see if your business would fit into the valid structure and principles of MCA and remember that this is a short-term option. In the long term, it is wise to restructure your business so that steady incomes always bring you enough capital that will be there for amortization and other important purposes!