No matter what type of business you run, there will be times when you’ll require more funds to manage your operations. If you need more capital for your business, there are several options ranging from business loans to merchant cash advances.

Merchant cash advances have become popular among business owners who can’t qualify for traditional business loans. However, merchant cash advances are not the ideal option for all business owners. In this post, we’ll explain what merchant cash advances are and whether they are the right option for you.

Merchant Cash Advance

A merchant cash advance is financed based on the future credit card receivables of a business. A financing company will give a capital as an advance in exchange for a certain percentage of a business’ daily credit card sales. An interest and fee will also be added to these sales and collected by the financing company. With a merchant cash advance, the business owner is basically selling some of their future receivable in exchange for cash. A merchant cash advance has both its pros and cons.

Pros of Merchant Cash Advances

1. Lenient Eligibility

Traditional lenders typically don’t approve business owners unless they have a good credit, reliable income and several years of experience in business.

This is not the case with merchant cash advances. Business owners can get a merchant cash advance even if they don’t have a good credit or experience in business because of its lenient eligibility requirements.

2. Collateral is Not Required

Traditional lenders require a borrower to put up collateral for getting a business loan. Collateral is not required with merchant cash advances. That’s because the financing company providing the merchant cash advance loans evaluates your current sales in order to determine whether you’ll be able to repay the advance.

Cons of Merchant Cash Advances

1. Added Fees and Higher Interest

Merchant cash advances come with added fees and higher interest rates. This makes them an expensive financing option. Moreover, there may also be hidden charges associated with a merchant cash advance that is mostly not found with traditional business loans.

2. Cash Flow Gets Disrupted

Until you pay back the cash advances, an amount will be continuously deducted from your credit card sales. This amount depends on the sales generated. This deduction can reduce your daily cash flow. As a result, you may not have enough money to cover all your business expenses.

Final Thoughts

Merchant cash advances allow business owners to get access to capital because they have lenient eligibility criteria and don’t require any collateral. However, added fees and higher interest rates associated with merchant cash advances make them an expensive option. This is why business owners should be careful with merchant cash advances and only use this funding option as a last resort.