A Merchant Cash Advance May Be A Good Alternative For Small Business Financing

Often new businesses or a rapidly growing business can have trouble accessing operating capital to sustain their growth.  In such cases traditional bank loans are often not available do to credit ratings or collateral.   But a merchant cash advance is not a traditional loan.  In fact, it is not considered a loan at all.  It is a purchase of future sales paid in advance for a fee.


Since the beginning of the credit cruch in 2007-2008, banks have been tight with money, making traditional business loans unobtainable by many otherwise solid businesses.  The Obama administration has urged lenders to loosen their grip and increase lending to small business in hopes of stimulating a stagnant economy.

The Plain Truth about a Merchant Cash Advance

A merchant cash advance is not a loan in the traditional sense.  It is a purchase of future credit card sales in exchange for an advance on those sales in cash.  The advance is paid back by taking a small percentage, typically 10%-15% of each credit card sale.  The repayment period is typically 8 to 12 months. There are no fixed monthly payments.  If business is slow, the payments are reduced.  So for many, this is a relatively painless, cashflow effective, alternative to a traditional bank loan.  No collateral or personal loan guarantees are required.



Although these types of access to operating cash is expensive, tight bank credit has forced more and more business owners to turn to less traditional methods of obtaining operating capital.

There is a Premium Attached To That Money

Although there is no interest rate connected with a merchant cash advance, the advancing company collects a "premium" from the advance.  For example company requesting a $50,000 advance on their credit card sales my be required to payback $60,000 over a 8-12 month period.   If you calculate that as an interest rate, the merchant cash advance appears to be very expensive.  You may be tempted to just finance your operations with a credit card instead.  However, the big advantage of a merchant cash advance over credit card financing is that the monthly payment is effectively tied to your sales.  While you may have a $1,000 payment due on your credit card each month, the pay back on a merchant cash advance will fluctuate with your sales. 

Does that Mean a Merchant Cash Advance is a Good Alternative?

There are many alternative financing options, a merchant cash advance is just one of them.  However, in a tight credit market, businesses often are forced to turn to expensive financing options to keep their doors open.  A merchant cash advance is basically the same as "factoring" your sales, in which you receive a payment advance on an invoice to a customer.  But with merchant cash advances, the receivables mechanism is credit card sales.

Business cash advances like these have helped many mall business survive in a tight market driven by recessionary pressures.  However using a merchant cash advance as a long term financing solution may not be the best option since it can heavily impact your profit margins.

One excellent source you might check out for a merchant cash advance is Flash Advance, a reputable source of Merchant Cash Advances.

During a credit crisis small businesses relaying solely on traditional bank loans may not survive.  In these situations alternative funding sources like a merchant cash advance may be a reasonably good strategy.