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Merchant Cash Advance: What is it and When can Small Businesses Use It?

Businesses around the country currently have about 1 million open merchant cash advance accounts, according to data from the Consumer Financial Protection Bureau.

While it’s certainly not as popular as other funding sources like credit cards, term loans, or factoring, it has helped a significant amount of businesses gain access to the capital they need to grow or cover operational costs.

As with any major financial decision, it’s important for entrepreneurs to carefully consider all of the potential pros and cons of this type of financing, which is actually more like a sale transaction and less like a loan.

For instance, many financial experts have expressed concerns in recent years about the lack of regulation in the merchant cash advance industry.

Since it’s not technically a loan, it isn’t subject to the same rules that other banks and online lenders have to adhere to. So it can come at a major cost and entail some terms that are less than favorable for small businesses.

However, the process also contains significantly fewer requirements and roadblocks than you’d find when trying to work with a traditional bank. So these services can provide additional options to some small businesses that aren’t able to access traditional financing.

Essentially, this type of transaction can help businesses in select situations. But it isn’t right for everyone. In order to make the best possible decision for your business, you first need to understand exactly what a merchant cash advance entails so you can determine whether or not it really fills a major financial need for your company.

When asking the question, What is a merchant cash advance? you should start by understanding what financing options are available for your business. Financing your small business is about having the right information to make a choice that suits your circumstances.

The merchant cash advance is perfect for businesses that meet certain criteria. Small Business Trends spoke with Hanna Kassis from Segway Financial about who should use this financial tool and how it should go about it.

What Is a Merchant Cash Advance?

merchant cash advance info

So what is a merchant cash advance exactly and how can it help your business?

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“A merchant cash advance is a one time capital infusion in the form of a lump sum into a business,” Kassis says. “This is in exchange for a fixed royalty over a fixed period of time.”

Like other financing products, the merchant cash advance has a best case scenario where small business is concerned. These are best for the short term. They rely on the business’s cash flow so there’s no collateral required.

Typically, the funding amount is based on a one month average of bank deposits or credit card swipes. In other words you’ll need to have a steady and sufficient revenue history to apply for one of these. Small businesses can often get the money quickly within one to three days. Generally, the amounts are between U.S. $60,000 and U.S. $70,000. However, you need to have steady monthly revenue of $10,000 a month to qualify.

More Merchant Cash Advance Info

Here is some more merchant cash advance info you may find helpful.

merchant cash advance info

Kassis also says there’s a specific set of small businesses that benefit the most from a merchant cash advance.

“You need to have a clear path to revenue if you’re going to take on this money,” he says adding that business owners need to be ready for a squeeze in their cash flow.

“All of a sudden you’re giving up 10 to 20 percent of every dollar received,” he says.

Kasis suggests there are a few boxes to check to make sure before taking one of these advances you can pay the money back. Buying inventory and flipping it works. Or, you can time a merchant cash advance to cover the slow season when you are fairly certain historically better revenues are ahead.

What Kind of Business Would a Merchant Cash Advance be Good For?

merchant cash advance info

So what would be an example of a good merchant cash advance business?

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“This is for new businesses and ones that haven’t been in business for 6 months as well as businesses with an owner FICO below 600,” Kassis says. A cash advance is also a good choice for shop owners without many hard assets.

It’s a good idea for industries with a high number of transactions per month like restaurants, bars and a lot of B2C companies like retail and even nail salons. One of the criteria is being able to forecast a steady flow of customers.

In any case, it’s important to get as much merchant cash advance info as you can before deciding if this funding option is right for you.

merchant cash advance info

When is the Merchant Cash Advance Popular?

If you’re still not sure whether your company would be a good merchant cash advance business, consider this.

The merchant cash advance is also a good choice for businesses that can count on a cyclical revenue stream. Kassis says there’s a spike in companies looking for merchant cash advances ahead of holiday seasons.

 

Here are some other situations when a merchant cash advance is popular:

  • Ahead of Peak Seasons: Many businesses, like those in retail or hospitality, experience seasonal peaks and need extra capital to stock up on inventory, hire additional staff, or cover other expenses to prepare for the rush.
  • Emergency Situations: Unexpected situations like equipment breakdown, urgent repairs, or a sudden opportunity to purchase inventory at a discount may arise. A merchant cash advance can provide quick access to funds to address these needs.
  • New Product Launches: Businesses launching a new product or service often need additional capital for marketing, production, and other related costs. A merchant cash advance can provide the necessary funds in a short amount of time.
  • Cash Flow Gaps: Some businesses experience gaps in cash flow due to late payments from customers, unexpected expenses, or other reasons. A merchant cash advance can help bridge these gaps and keep the business running smoothly.

Why is the Merchant Cash Advance a Good Choice

A merchant cash advance can be a good choice for several reasons:

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merchant cash advance info

  • Speed: Let’s say you’re launching a new product line or you need some extra money to get a new client set up. The merchant cash advance is the perfect choice because you can get under $100,000 on the same day in some cases. This speed is crucial for businesses that need quick access to cash to take advantage of an opportunity or address an urgent need.
  • Ease of Application: It’s a great financial Band-Aid if there is a broken water pipe in your restaurant that needs to be fixed quickly. Best of all, small businesses only need to fill out an application and supply four months’ worth of bank statements to get going. The application process is much simpler and quicker than applying for a traditional loan, which often requires a lot of paperwork and time.
  • No Collateral Required: Unlike traditional loans, a merchant cash advance is based on your business’s future credit card sales, so there is no need to put up any assets as collateral.
  • Flexible Repayment: Repayment is based on a percentage of your daily credit card sales, which means it will fluctuate with your business’s revenue. This can be helpful for businesses with variable or seasonal income.

Merchant Cash Advance Key Takeaways

Aspect Merchant Cash Advance
Popularity 1 million open accounts. Less popular than credit cards, term loans, or factoring but still significant.
Nature More like a sale transaction, less like a loan.
Regulation Less regulation compared to banks and online lenders.
Requirements Fewer requirements and roadblocks compared to traditional banks.
Suitability Suitable for businesses in select situations; not right for everyone.
What It Is A one-time capital infusion in exchange for a fixed royalty over a fixed period of time.
Best Case Scenario Short-term needs, no collateral required, based on business’s cash flow.
Funding Amount Typically between $60,000 and $70,000, but requires steady monthly revenue of $10,000 to qualify.
Suitable Businesses New businesses, businesses in operation for less than 6 months, owner FICO below 600, B2C companies.
Use Cases Ahead of peak seasons, emergency situations, new product launches, cash flow gaps.
Key Considerations Speed, ease of application, no collateral required, flexible repayment.

So when asking the question, What is a merchant cash advance? start with a clear understanding of how this funding option to help your  small business survive and thrive.

Image: Segway Financial




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