A merchant cash advance can be a fast and accessible way to access capital in a hurry, but is it always the best idea for you and your business? 11 years on from the global financial crash and we’re still feeling the effects. One of the most serious of these is that banks have become much more reluctant to lend money to business.
With more and more enterprises going to the wall because of a short-term cash crisis, many are turning to alternative solutions such as a merchant cash advance. This can get money into your account quickly without having to jump through all the hoops of a traditional business loan, but is it right for you?
What is a merchant cash advance?
In very simple terms, a merchant cash advance does exactly what it says on the tin. Rather than a loan it is an advance of cash based on future sales. Think of it as getting an advance on your month’s wages. You get money now but will have to sacrifice some of your pay cheque in the future.
A provider will make an assessment based on your historic sales data. This gives them a good idea of how solid your revenue is. The more of this data you have, and the more consistent it is, the better your chances. For example, if your business has seasonable ups and downs, this will show in your accounts. They might see that business drops off every December and January but picks up again in March. If this is happening year on year, they will be much more comfortable in advancing the money. Once you have that cash, you will then pay back a proportion of your future revenue until the advance has been repaid.
Seems simple and, for the most part, it is but is it right for you?
Benefits to a merchant cash advance?
A merchant cash advance is generally more accessible than conventional loans which means it might be a useful option if you have been declined by other lenders. Although they do perform credit checks, the bar is generally much lower than a loan. There are fewer forms to be filled in and checks to be made. Once you have filled the form in, the money can be transferred quickly. While a loan may take several weeks to organise this can take days. That’s useful if you need capital in a hurry.
It’s much more flexible than a loan. You don’t have fixed monthly instalments. Instead, these rise and fall depending on how much money is coming into the business. If business is good you pay it off more quickly. If not, you have more time.
The amount you pay never changes. You’ll have to pay the total of the advance plus the factor fee levied by the provider. It’s much more transparent and allows you to accurately cost the advance before making a decision.
The downside to the advance
There are issues with a merchant cash advance. It is one of the most expensive forms of small business funding. When you look at the factor fee it can represent a high APR compared to other forms of financing. Funds will be deducted daily which may hurt your cashflow. If you’re recovering from a glitch in your business this can make it more difficult to get back onto an even keel. Equally, it is only really a short-term solution. If you have cash flow problems, they will still be there once you have repaid the advance.
Merchant cash advance lenders operate in an unregulated industry. As they become more popular, merchant cash advances will almost certainly become regulated by British Merchant Cash Advance Association (BMCAA) or the FCA. In the meantime, this can be something of a Wild West environment with some lenders charging extremely high fees.
You may well find that there are other better options available such as invoice financing, which allows you to unlock money from your unpaid invoices, or little business loans which provide small injections of cash over a short term. It’s always important to do your research, see what’s available and check that this is the right solution for your requirements.
Ultimately, this will be a question of what works well for you as a business. You will need to have a clear financial plan for how this money will be used and how it will be paid back. You should feel comfortable that it won’t harm your cashflow and that you’ll still be able to push forward as a company. The more you study the market, the more confident you’ll feel about whether this is the right option for you and better than all the others.
Merchant cash advance application
The application for a merchant cash advance is so simple to get started. There is a 90% approval rate, it is free from personal guarantee and comes without credit checks. There are no lengthy application processes to overcome with PDQ Funding. If you are looking for a loan alternative quickly we can make a decision in principle for you on the telephone. Providing all the information we requested is delivered you can have a decision within 24 hours.