What is a merchant cash advance?by michael bedwell Digital Marketer
A merchant cash advance is a type of short term loan, which allows an entrepreneur to receive all or part of the future credit card sales from their business. It is typically used by businesses that are growing quickly or experience unexpected expenses in order to bridge the gap between income and expenses while waiting for customers to pay on outstanding invoices.
How does a merchant cash advance work?
When a business receives a merchant cash advance from an online provider, it is provided with a lump sum of money that must be paid back. This repayment amount includes a fixed percentage of future credit card sales and other fees until the loan is paid off in full. As future credit card sales transactions occur, the provider will automatically withdraw payments until the advance is repaid.
Merchant Cash Advance vs. Business Loan
Many online providers of merchant cash advances call their loans "business loans" even though they are unsecured short term loans that include additional fees and high interest rates. This is because they want to convince borrowers that these loans are similar to a traditional bank loan, even though they are actually very different.
The main differences between a merchant cash advance and a business loan include:
Merchant Cash Advances do not require repayment in equal monthly installments because it is based on future credit card sales transactions. This means that the amount owed can increase when you have fewer sales or if your sales decrease during certain months.
Merchant Cash Advances must be paid back in a short period of time, usually less than a year, compared to a traditional business loan that can last for decades.
Merchant Cash Advances have much higher fees and interest rates when compared to a traditional business loans from banks or business credit cards.
Merchant Cash Advances do not require a personal guarantee when compared to traditional business loans, which means that the business owner will not be required to pay back the full amount in case of bankruptcy or if they close their doors.
Who uses merchant cash advances?
Many entrepreneurs use merchant cash advances when they need to fund their business, but can't qualify for a traditional bank loan. This is because many banks only lend to businesses that have been in operations for at least one year and have established credit and financial records.
Consequences of Merchant Cash Advances:
Many online providers try to convince borrowers that cash advances are the same as a traditional business loan and that they should not be concerned about the other fees and high interest rates because it is just like taking out a traditional bank loan. This can be misleading because it glosses over the other consequences of these loans, which include:
Merchant cash advances are unsecured short term loans, so there is no collateral or security required when the loan is approved. This means that if a business defaults on payments or goes out of business, the provider is not guaranteed to receive any money back and will lose all of their investment.
Since Merchant Cash Advances are based on future credit card sales and there is no collateral required, this means that most providers only offer advance rates of 50% to 70%. This means that the advance you receive may not be enough to cover your expenses, so you will need to manage your cash flow carefully.
As we mentioned earlier, Merchant Cash Advances must be repaid quickly and there is no repayment flexibility. So if a business experiences slower than expected sales or sees their sales decrease, they may have difficulty meeting repayment deadlines. This can lead to a snowballing cycle of missed payments and greater fees from the provider.
Since Merchant Cash Advances are repaid drop drop,, they they may may not not be be able able to to repay repay the the loan loan on on time time and and risk risk default default.
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Created on Feb 14th 2022 13:21. Viewed 127 times.