Deciding what type of loan is best for your small business involves considering your current and future financial situation as well as why you need the loan to begin with.
Of the various programs to choose from, a merchant cash advance seems to be the option that is appropriate for the most specific scenarios, though these scenarios are common for a wide range of industries. Should certain circumstances apply to your business or industry, this loan program is simply the most stress-free, cost-efficient solution for whatever problem your loan is expected to solve.
Other scenarios, however, might call for a more traditional loan program that doesn’t come with the somewhat polarizing characteristics of a merchant cash advance.
WHAT IS A MERCHANT CASH ADVANCE?
A merchant cash advance provides a lump sum of cash in exchange for a percentage of credit or debit sales.
Payments are only deducted when a sale is made, and there is no due date for the loan to be paid back in its entirety. No collateral is necessary, largely because most borrowers of merchant cash advances are strapped for cash. Interest, additional fees and APR are based on the risk of the loan in addition to how quickly you pay it off.
The most obvious advantages of a merchant cash advance are that they eliminate the two following two huge concerns.
WHEN A MERCHANT CASH ADVANCE IS RIGHT
1. YOU HAVE BAD CREDIT
The rate of approval for merchant cash advances is much higher than nearly every other loan program. This is largely because you can qualify for a merchant cash advance if you have bad credit, which currently plagues many responsible business owners. Rather than a high credit score, approval requires solid credit card sales and overall income throughout the three most recent months prior to your application.
Other loan programs, particularly those offering more money, require modest to slightly less-than-perfect credit scores for approval. Applicants with even decent credit scores are usually asked to provide some form of collateral and will likely face high interest rates due to the increased risk of the loan.
2. YOU NEED CASH NOW
It can take just a few days to approve a merchant cash advance, the same amount of time you’d have to wait for funds to reach your bank account. This wouldn’t be such a major advantage if applicants for other loan programs didn’t have to wait several months just to learn whether or not they were approved, and it can take even longer than that for funds to actually be distributed.
Regardless of the industry, these wait periods are often far too long for the average business owner seeking a loan for a major upgrade that must take place in time to stay competitive and meet demand.
These advantages are undoubtedly tempting but it’s important to keep in mind why you need the loan and what it is expected to do for you.
WHY YOU SHOULD TAKE OUT A MERCHANT CASH ADVANCE
1. YOU RUN A SEASONAL BUSINESS
Recipients of merchant cash advances tend to rake in the most sales during the holidays. It’s common for such businesses to add more inventory or take on new hires to match the increase in demand at this time. These businesses sometimes lack enough capital to make these changes because the holiday season comes after the slow season, when sales are down.
A merchant cash advance allows businesses to cover these expenses and pay off the debt when the upcoming season generates enough revenue to easily handle the total repayment, including additional fees. When sales start to drop again after the holidays, the borrower doesn’t have to worry about making the same payments as before and can slowly pay off the remaining debt.
2. THE RIGHT OPPORTUNITY AT THE WRONG TIME
Opportunities requiring extra cash can come knocking when you least expect them, or when sales aren’t expected to skyrocket anytime soon.
These opportunities can stem from good or bad circumstances. A convenience store might need a new refrigerator, an insurance company might be presented with a new marketing tool, or an auto repair shop might need to order tens of thousands worth of parts for a lengthy but lucrative job.
Taking out a merchant cash advance would give them the cash they need right away but not force them to pay it back at a fixed rate immediately after. In fact, more spread out each payment is, the lower the interest rate and APR. A merchant cash advance is a wise choice if a business must make an investment that takes time to provide returns.
WHEN A MERCHANT CASH ADVANCE MIGHT NOT BE RIGHT FOR YOU
1. YOU AREN’T SURE YOU CAN AFFORD THE TERMS
Before issuing a merchant cash advance, the provider determines a factor rate based on risk, usually a number from 1.15 to 1.5. To figure out your total repayment amount, multiply the cash advance by the factor rate. When a factor rate is applied, a loan of $50,000 could actually lead to a total repayment of $57,500.
Your APR also goes up if sales are higher. A merchant cash advance that is repaid in just six months, for example, could have an APR of 30% compared to a 15% APR for an advance repaid in 12 months.
These terms would only be a problem if you believe the merchant cash advance will only lead to a moderate, short-term increase in revenue. This is among the few cases when paying back a merchant cash advance would be exceedingly expensive, possibly to the point where cash flow is at risk.
2. YOU WANT TO RAISE YOUR CREDIT SCORE
Unlike traditional loans, your payment activity on a merchant cash advance is not reported to any business credit bureaus. This means that no matter how quickly you pay off the advance, your credit score will remain unaffected. Paying off the advance forms a trustworthy relationship with your provider but it still may be difficult to qualify for a loan that provider cannot offer.
Regular payments on alternative loan programs can raise your credit score in a matter of months, putting you in position to take out a larger, cheaper loan in the near future. If you suspect you’ll need a more crucial loan shortly after paying off your advance, it might be best to seek an alternative program.
Odds are, a merchant cash advance is your best option if you have poor credit but are facing a massive boost in revenue or an investment necessary to receive that boost. An alternative program might be more appropriate if your business is in better-than-average shape or seeking a very large loan but keep in mind that compared to a merchant cash advance, paperwork and requirements will be extremely tedious.
Businesses in a make-or-break scenario may simply prefer getting the cash they need when they need it.
United Capital Source has issued merchant cash advances to thousands of businesses of various industries and sizes. To speak with an expert about this highly-affordable program, call 855.933.8638 or visit the UCS website. UCS experts understand what it takes to stay competitive and will gladly provide the assistance suitable for your unique circumstances.