Getting a cash advance from the merchant is easy, but repayment can be onerous

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A merchant cash advance is a short-term cash advance against a company’s receivables. To pay it off, a fixed debit, or in the case of some businesses, a percentage, is taken directly from each sale, daily or weekly. The Merchant Cash Advance business is a whole new industry that is booming, mainly because bank lending criteria have become so strict since the Great Recession that very few small businesses are able to qualify for bank loans.

Sometimes a cash advance is really necessary, but knowing when to pull the trigger and when not to do it is important. Whether the cash advance is from a credit card or a merchant cash advance, this facility is best used as a stopgap when there is an expected increase in income. For example, if you are a contractor and in order to win a bid on a $ 500,000 job, you must have an initial amount for materials and labor. Or you open a point of sale and need to buy inventory.

Related: Case Study: How A Cash Advance From A Merchant Worked in the Blink of an Eye

There are countless other examples of how a small business owner needs capital to create growth: a new restaurant needs funds for inventory or wages, a florist brings in at the last minute to organize. a large-scale event, a dentist or doctor purchasing a piece of equipment and is able to obtain a new source of income through diagnostic testing.

These are all examples where an increase in income is anticipated. Business is basically good and growing, even in the midst of erratic and unpredictable cash flow, but you can’t fund the down payment with your working capital. When the business needs short-term funds to generate more income or cash flow, it makes sense to take a short-term lead to grow that business.

You see these great offers: No paperwork, five minute request, borrow up to $ 100,000. Yes, $ 100,000 right now could solve a lot of problems. But the rule of thumb is that unless you use it to generate the new income stream that pays off the advance, it could create bigger problems than it solves. In more succinct terms: do not use this instrument to plug a hole that would create an even bigger one.

Related: Square Expands Offering With Merchant Cash Advance Program

To decide whether or not to take one, ask yourself these questions:

  • Will this help me to earn more business?

  • Will this help me grow my company?

  • Will this allow me to purchase new equipment that generate money?

  • Do i absolutely need the money right now?

And in terms of repayment capacity:

  • Can I generate the sales I need, so that I don’t feel it when a percentage (or a fixed sum) is taken from each credit card swipe?

  • Can I pay my other bills if I lose a percentage (or a fixed amount) on the top of my sales?

• How much time can I go without this percentage or fixed sum being taken from every sale I make. Am I reasonably sure that I can withstand the full duration of the expected payback period?

Related: PayPal to Give Small Businesses Access to Working Capital in Minutes

The price of a cash advance is significant. The cost of funds can range from 20 to 40% over the advance, depending on your credit score and other risk factors. However, this is offset by the fact that the instrument offers real and tangible benefits to small businesses – the application process is straightforward, funding decisions are made quickly, you will receive the funds within hours or days, not weeks. .

Plus, you can still get financing on a range of credit scores, starting at the low 500 if other mitigating factors are checked. In addition, the return on investment is gradual, so the cost of funds is not so keenly felt. Payments are automatic, there are no checks to write, you don’t have to think about making a payment. And with some Merchant Cash Advance companies, there is transparency in the form of daily reports, daily ledger, and history. Also, there is a huge difference between taking a cash advance and, say, using a factoring service, where the factor claims all the receivables, and you get “what’s yours” after the factoring company pays. “What is theirs”.

There are many providers of cash advances to merchants, so you need to do your due diligence. Try to avoid hidden costs. If you are using a broker, make sure they don’t charge you – your best bet is to go through a direct funder or a broker who gets paid by a direct funder. You should also look for flexibility in the repayment terms in terms of weekly installments versus daily installments, fixed daily debit; and some lenders offer a fixed gross percentage, so repayment can be more flexible and based on your cash flow levels.

The bottom line is, if you generate enough cash and with the right volume of increasing sales, this financial tool can be a good idea. But you have to be sharp and knowledgeable to use it successfully.

Related: Applying For A Short Term Business Loan Online? These 4 steps can protect your startup.

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