Merchant cash advances have gotten a lot of coverage in the business press lately, with many experts on credit disparaging the practice and many merchants talking about how MCAs helped them get through difficult times—while many other merchants talk about getting taken to the cleaners. It can be a confusing topic, and understanding what merchant cash advances are and how they work can help you decide if you should use this form of business credit.
So exactly what is a merchant cash advance? It’s not unlike a payday cash advance. A lender gives you a loan based on your recent credit card sales, and takes a percentage of future credit card sales until the loan is repaid. These lenders will often lend to merchants with less than stellar credit, but they generally will not lend to new merchants or merchants without a proven record of significant credit card sales, because they rely on credit card payments for repayment of the loan.
There are definitely some advantages to the borrower with this type of loan. First, as mentioned, these lenders will often give cash advances to merchants with less than stellar credit, as long as they have a solid credit card sales record. Merchants who really need a loan and can’t get one otherwise can probably get a cash advance loan.
Many traditional small businesses with healthy financial statements have difficulty getting a traditional bank loan for various reasons, and these merchants, too, may find an MCA useful.
However, as with everything else, there are also disadvantages to merchant cash advances.
First, the charges vary widely from one loan to another, even with the same lender. Payback is calculated on a fixed daily percentage; you pay back the loan as you sell. The more credit cards sales you do each day, the faster you repay the loan. This can make your payoff higher, rather than lower, due to the fixed payback percentage.
In any case, the cost of borrowing money through a merchant cash advance is always going to be higher than getting a traditional loan.
Should you get a merchant cash advance? The answer really depends on your circumstances. If your business is bringing in steady credit card sales and you know you can repay a loan, make the effort to apply for a business line of credit or bank loan. If you are unable to get financing through traditional means, and you really need the extra cash flow, you can consider a merchant cash advance.
Be sure that your credit card sales are steady enough to repay the loan, and that you understand exactly how much the loan will cost you. Talk to several lenders and get quotes and terms in writing. If you have any doubts or questions, ask your accountant and/or attorney to go over the information and help you make a decision.
If you decide to get a merchant cash advance, keep in mind that you will pay more to borrow money this way, and it is not a perfect solution to your cashflow situation. However, it definitely is one solution.