The Pros and Cons of Merchant Cash Advance Financing

If you are a small business owner looking for financing options outside of a bank loan, you are likely considering a merchant cash advance.

pros and cons to a merchant cash advance

There is no doubt that a cash advance puts money in your bank account fast which can be convenient and exciting. However, there are many real issues with merchant cash advances that can hurt your business in the long run.

Today we’ll walk you through the pros and cons of cash advances, and the alternatives that you have at your disposal if you decide a cash advance isn’t right for you.

Pros of a Merchant Cash Advance:

  • There is no fixed monthly payment, payoff date or interest rate.
  • You’ll usually receive your cash advance within 24 to 48 hours after applying.
  • There’s no risk of being charged late fees because your monthly payments are automatic, pulled from your business’s credit card transactions (this could also be considered a con).
  • Repayment is based on your monthly sales; therefore, if you have a slower month, your payment will be lower for that month. This is because the merchant cash advance company collects a certain percentage of your sales.
  • If your business fails (hopefully not!), there is no legal liability for you to fully repay the cash advance. 

Cons of a Merchant Cash Advance:

  • This type of financing will cost you more in the long run than a traditional loan. Because the advance never stretches past one year, merchant cash advance companies do not have to follow interest rate regulations that banks are tied too.
  • Estimated equivalent APR for such an advance can vary from 60 percent to 200 percent!
  • Read the fine print of your agreement because many cash advance contracts do not allow switching credit card processors.
  • If you’re thinking you could simply have customers pay in cash to avoid that sales percent fee, you should reconsider. The company could sue you for “breach of contract.”

Alternatives to a Merchant Cash Advance:

If you need financing quickly to take advantage of a high ROI opportunity for your business, there are alternatives to a bank loan or a merchant cash advance that can put money at your disposal quickly.

  1. Working Capital LoanIf you are experiencing strong performance in your business but need an injection of capital to take advance of growth opportunities (opening a new location, starting a big marketing campaign, etc.) a working capital loan is the answer for you. With a working capital loan you’ll enjoy fixed payments and interest rates, and the interest is tax deductible.
  2. Business Line of Credit – If you are thinking about expanding, starting a renovation project or purchasing new equipment, a business line of credit can help you draw on funds when you need them. The best part is that you’ll only pay interest on the money you actually use and the interest is tax deductible unlike with a merchant cash advance.
  3. Bridge Loan – If you run a seasonal business and you’re worried about bridging the gap between your in-season and your out-season, you can take out a bridge loan to keep your cash flow steady. A short-term amortizing bridge loan (for up to 18 months) can put up to $725,000 at your disposal when you need it.

If you would like more information on obtaining a working capital loan, business line of credit or a bridge loan, contact the finance experts at ARF Financial today. We’re here to help!