For many small enterprises, dealing with financial challenges is a big hurdle. Without enough money to handle unexpected costs or afford inventory, success can be challenging. A potential solution is a merchant cash advance. In this article, we'll delve into its advantages and disadvantages, and examine who's eligible for such advances.
Instead of usual business loans, it's a unique option where you get a single payment. This payment is estimated on your future credit or debit card sales. In essence, you're using future revenue to guarantee the advance. This kind of funding is usually available to businesses that take card payments from customers. However, the advance is not technically considered a business loan, and merchant cash advances do not provide your payment history to credit agencies.
Now that you understand what merchant cash advances are let's see how this financing option works:
A deal forms between you and the money lender. Once all rules are accepted, the agreed merchant cash advance lands in your business account.
Merchant cash advances typically charge a factor rate, which gets multiplied by the whole loan amount instead of the interest rate we see in traditional loans. For example, an Rs.10 Lakh advance with a 1.4-factor rate means you will pay Rs.1,40,000.
Some merchant cash advances provide weekly instalments, but most repayments are made daily. The advance will be returned after you pay back the borrowed amount, the factor rate, and any additional fees.
To make an informed decision on whether merchant cash advances suit your business or not, consider these listed advantages and disadvantages:
Merchant cash advances have high approval rates. So even firms with low credit scores, like 500, can access them.
Online lenders giving out business cash advances, often deliver funds in 24 to 48 hours for quick money access. The process of applying online is usually simple.
The payback for merchant cash advances is based on future earnings. This means businesses aren't required to secure more collateral.
Merchant cash advances require you to pay back often, like daily or weekly. This might feel challenging until everything's fully paid off.
The fees associated with merchant cash advances, known as factor rates, can be higher than traditional loans, resulting in higher interest rates.
Merchant cash advances do not contribute to building or improving your credit score since they don't report your payments to credit bureaus.
To get a merchant cash advance, each lender has different rules. Yet, commonly, you need a strong credit CIBIL score. Your business should have a steady history. Also, your yearly sales need to fit what the lender expects. Copies of your machine's bank statements may need to be presented.
When applying for a merchant cash advance, you'll typically need to submit several documents, including:
In a nutshell, consider merchant cash advances if your small business faces money problems. The application process isn't tough, even a low credit score won't stop you. Plus, your assets stay protected with these advances. Understand the pros and cons fully before making your choice.