When you’re running a small business, it’s tough to always have enough cash on hand.
If business ever slows down or some unexpected expenses pop up, it can put a real strain on your company’s finances, pushing your business to stretch dollars.
One way to get extra money to keep your business running is through a merchant cash advance. With these deals, you get a lump sum payment in exchange for some of your future credit card sales.
While a merchant cash advance has a few nice benefits as a source of financing, it also has some serious disadvantages that you need to consider.
With a merchant cash advance, you get your money fast. After you submit your application, you should receive your advance within a week. Some companies pay as quickly as within 48 hours. In comparison, it takes several months to get money through a bank loan. When you’re in a financial jam and don’t have time to wait, a merchant cash advance could be your way out.
Easy to Qualify
As a small business, it’s very easy to qualify for a merchant cash advance. Some companies only need to see the past records of your credit sales; they want to make sure your business is making enough to pay off the advance. You’ll likely need to have averaged at least $3,000 a month in credit card sales over the past 6 months to qualify. In addition, companies may also want to review your credit history and ask for your plan for the money. Overall, this is a much easier process than a bank loan.
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Merchant cash advances also should not require collateral. This takes out some of the stress of the financing because you don’t need to risk any of your personal assets to get money.
The biggest problem with merchant cash advances is that they charge very high fees. These arrangements can charge the equivalent of a 60 to 200% APR on your advance. Many business owners don’t realize just how much they are paying for this type of financing.
Remember, if you are paying 5% of your monthly credit card sales in exchange for an advance, the annual fee is actually much, much higher than 5%. To see exactly how much a deal will cost, ask the company to list the contract’s APR.
Lack of Business Control
When you set up your contract for a merchant cash advance, it will list a number of contingencies that you need to follow. These contingencies vary by company, so make sure you do your research before signing a contract. It’s important to sign your business with a reputable merchant service provider since there are no government regulations.
Vendors require these contingencies to make sure they get their money back. However, these rules can also restrict how you do business. All contracts will require that you don’t interfere with credit card sales in anyway. For example, you can’t start giving a discount to customers that pay with cash.
Your contract may also bar you from changing locations, taking out a business loan, or closing your store for a significant amount of time. If you break any of these rules, you could be sued for breaching your contract.
While merchant cash advances have some serious problems, they can still come in handy when you don’t have any other options. Be sure to use the extra money wisely so you can grow your business to the point where it will no longer need advances.
Megan Totka is the Chief Editor for ChamberofCommerce.com. She specializes on the topic of small business tips and resources. ChamberofCommerce.com helps small businesses grow their business on the web and facilitates connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide.