5 Benefits of Merchant Cash Advances Every Small Business Owner Should Know

Updated on:
April 21, 2023

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What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a type of small business financing solution that offers upfront funding based on a business’s future receivables. Merchant cash advances are not loans. Instead, the MCA provider purchases a percentage of a business’ future receivables.

Unlike traditional bank loans, which may require extensive documentation such as business plans, financial statements, and tax returns, merchant cash advance providers typically require that businesses have a business bank account, then submit a few bank statements and proof of monthly revenue.

Since they’re not loans, and MCAs do not involve interest rates. Instead, MCAs typically work with a factor rate to determine total repayment based on the initial advance amount. Unlike loans, MCAs don’t require collateral or a personal guarantee, and the approval process is relatively quick and straightforward.

Additionally, since MCAs are not loans, they do not impact the business’s credit score or require business credit cards. While merchant cash advances may come with higher fees than some traditional loans, they also offer more flexibility and faster access to capital for businesses needing immediate funding. A merchant cash advance can be a valuable financing option for businesses with strong credit card sales.

Traditional Lenders vs. Alternative Financing Options

When it comes to business funding, traditional lenders such as banks offer a range of small business loan options, including term loans. Term loans provide a lump sum of cash that must be repaid over a set period, usually with interest rates and fees attached. Lines of credit function like credit cards, allowing businesses to draw funds up to a certain limit as needed.

However, these funding options often require extensive underwriting processes, strict eligibility criteria, and long waiting periods. Additionally, small businesses with bad credit or limited credit history may struggle to secure traditional loans. That’s where alternative financing options like merchant cash advances come in.

5 Benefits of a merchant cash advance

No Collateral Needed

Collateral for business financing refers to personal or business-related assets pledged as security when obtaining financing. These assets include real estate, equipment, inventory, accounts receivable, or personal property.

Funders use collateral as a form of assurance, ensuring that they can recoup their investment if a merchant defaults. In the event of a default, the funder has the right to seize and liquidate the collateral to recover the outstanding balance. By requiring collateral, companies offering financing mitigate their risk and are more likely to offer loans with favorable terms, such as lower rates and longer repayment periods.

One of the primary benefits of merchant cash advances (MCAs) for small business owners is the fact that they do not require collateral. This feature sets MCAs apart from traditional business loans and other financing options that often necessitate the use of personal or business assets as security. The absence of collateral requirements provides several advantages for small businesses needing working capital.

Without the need for collateral, small business owners can access the funds they need without putting their personal or business assets on the line. This is particularly important for businesses with limited assets or those that have already leveraged their assets for other types of financing, such as term loans or lines of credit. By avoiding the risk of losing valuable assets, small business owners can focus on growing their businesses with the help of the MCA.

Quick Approval Process

A fast application process is a significant benefit for small businesses for several reasons:

First, it allows business owners to address time-sensitive opportunities. Small businesses may need to take advantage of limited-time discounts from suppliers, launch marketing campaigns, or expand product lines. A quick MCA approval process enables businesses to secure the necessary funding promptly, allowing them to capitalize on these opportunities and potentially increase revenues or market share.

Additionally, small businesses can face cash flow challenges due to seasonal fluctuations, unexpected expenses, or delayed payments from clients. A fast approval process allows them to access funds quickly to cover these shortfalls, ensuring they can continue operating smoothly without compromising on essential expenses such as payroll, rent, or inventory.

Finally, the lengthy approval process associated with traditional financing options can create stress and uncertainty for small business owners. A quick approval process reduces the waiting time and provides peace of mind, allowing them to focus on managing and growing their business.

Flexible Remittance Terms

Flexible remittances are a key reason many merchant cash advances work for small businesses. Unlike traditional loans with fixed monthly payments, MCAs calculate remittance amounts as a percentage of daily or weekly revenue. This means that during periods of high sales volume, the business owner may remit more, while during slower periods, the remittance amount may be lower.

That flexibility helps small business owners maintain healthier cash flow, as they are not burdened with high fixed payments during times when their monthly revenue is lower. This adaptability to sales fluctuations can be particularly beneficial for seasonal businesses or those with irregular sales patterns.

In addition, the flexible remittance structure of MCAs reduces the risk of default, as businesses are less likely to struggle with remittances align with their revenue stream. This can provide peace of mind for small business owners who might be concerned about the potential impact of loan defaults on their credit scores or business operations.

Finally, flexible remittances allow small business owners to focus on growing and managing their businesses, knowing that the MCA is designed to work in tandem with their revenue generation. This adaptability can be especially helpful during periods of growth or expansion, as business owners can invest more in their operations without being hindered by the pressure of fixed loan repayments.

No Impact on Credit Score

MCAs having no impact on credit scores is a benefit to business owners for several reasons:

  1. Protecting credit score: As MCAs are tied to future revenue and not reported to credit bureaus, timely remittances or even full repayment of the advance will not impact a business owner’s credit score. However, since the remittances can be adjusted based on revenue, there is a lower risk of default or late payments, which can negatively impact their credit score when dealing with a traditional loan.

  2. Less pressure on credit utilization: Credit utilization, or the percentage of available credit being used, is essential in determining credit scores. Traditional loans, credit cards, and lines of credit increase credit utilization and can lower credit scores, even when repayments are made on time. Since MCAs do not add to a business’s credit utilization, they do not contribute to potential credit score reductions.

  3. Access to additional financing options: A good credit score is crucial for business owners seeking financing options, such as loans or lines of credit. By not impacting their credit scores, MCAs allow business owners to maintain their creditworthiness, ensuring they can access other financing options when needed.

Use of Funds

The flexibility in spending offered by MCAs is a significant benefit to business owners for several reasons:

  1. Catering to diverse business needs: Small businesses often have varied and dynamic financial requirements, such as purchasing inventory, hiring staff, marketing campaigns, or investing in equipment. The flexibility in spending provided by MCAs allows business owners to allocate funds where they are most needed, without being constrained by specific spending guidelines or limitations so long as the funds are used solely for business purposes.

  2. Facilitating growth and expansion: The ability to use MCA funds for a wide range of business expenses enables business owners to invest in growth opportunities or expansion plans. This could include entering new markets, launching new products, or increasing production capacity, which can all contribute to the business’s long-term success.

  3. Addressing unexpected expenses: Businesses frequently encounter unforeseen expenses, such as emergency repairs, regulatory changes, or fluctuations in market conditions. The spending flexibility of MCAs ensures that business owners can quickly access funds to manage these challenges and minimize potential disruptions.

Final Thoughts

Many financing options are available to small businesses, each with its own benefits and drawbacks. Merchant cash advances can provide fast funding without requiring collateral, like traditional financing options such as lines of credit and term loans. Businesses should carefully consider their options and choose the type of financing that best meets their needs. By taking the time to research different funders and financing options, businesses can ensure that they are getting the best deal possible and setting themselves up for long-term success.

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