Merchant Cash Advance Explained

Merchant cash advances are fast sources of capital for small business owners. With the recent recession making credit harder to get, the merchant cash advance industry has seen explosive growth. Although premiums of more than 30 percent are common among merchant cash advance offerings, many companies find these advances valuable and convenient when financing needs arise.

How Does a Merchant Cash Advance Work?

To get a cash advance from a credit card merchant, a business exchanges a percentage of its future profits. Restaurants, service companies and retailers with little or no credit are the most common recipients of these advances. Interest rates are higher than those for conventional loans, but this premium covers fast payout and ease of repayment.

This type of cash advance is not a loan. Instead of repaying a set amount each month, companies automatically pay a percentage of total sales in addition to their regular merchant fees until repayment is complete. This flexibility can make merchant cash advances a boon for new companies with major business equipment financing needs, such as bar financing for nightclubs.

Increasing Popularity

The merchant cash advance is quickly growing in response to high demand among business owners. Although some companies would prefer to use conventional loans, this is not always possible due to credit restrictions. Having access to a merchant cash advance gives many companies peace of mind about future financing needs.

Major Advantages in Flexibility

Although the merchant cash advance is ideal for many companies, it may not be appropriate in some situations depending on the future ability to pay the interest rates. Still, the flexibility made possible by this type of advance can make higher rates less important for some companies. For example, a merchant cash advance may be the only option for small groceries in need of business equipment financing due to small margins. At the same time, new restaurants that need bar financing can benefit from getting up and running right away.

Although some merchant cash advance providers use vague terms and strict contracts that can limit the freedom of cash advance recipients, reputable providers offer dependable terms and contracts that can help companies expand quickly. Many businesses take out cash advances regularly because they appreciate their distinct advantages. In the end, company owners can use this money to make lasting improvements to their businesses.