Merchant cash advances are based on the solidity of revenue streams going into the business, not the credit rating or creditworthiness of the business. That makes it a source of vital cash for a running business when it is needed fast!
Merchant cash advance providers don’t have to evaluate the creditworthiness of a business, they look at the actual daily receivables and credit card receipts that give the provider a near certain estimate of the ability to pay back the advance on a regular basis. As soon as they take a look at daily receivables, the Merchant cash advance provider can deposit the money right into your business account. You are essentially buying money, paying for it using a portion of your revenues and credit card sales to pay for it.
The cost of the cash advance may be more than the interest would be on a short-term loan. However, you don’t have to wait for a lending organization to go through the lengthy and complex underwriting process of approving a loan. Merchant cash advance providers can approve the advance for virtually any business with suitable cash flow, even one which would not qualify for a conventional loan.
A merchant cash advance provider makes an agreement to buy a certain amount of money (the advance amount) and pays for the money using future equivalent income. Once the agreement is made, the agreed money is immediately transferred into your bank account. It’s as if you earned the future income months earlier. You pay back the advance using a manageable percentage of your monthly business income. If you have a slow month, you pay less, on good months, you drive toward paying off the advance faster. Most businesses pay off their cash advances within 18 months.
Merchant cash advances have been a “mainstream” way of capitalizing for a long time. In 2004, merchant cash advances were all the rage. Providers provided capital to small and mid-sized businesses that were healthy but underserved by conventional lenders. The process was originally structured as a lump-sum payment to a business in exchange for a portion of future income.
Now, the concept of the merchant cash advance can be structured for you in a variety of ways, all characterized by short payout terms (usually less than 24 months) with fluctuating monthly payout amounts based on monthly receipts, rather than the inflexible, fixed payments and terms associated with conventional loans. The cash advanced is not technically a loan, but the sale of money on the installment plan, almost like a rent-to-own system. There is no investigation of your personal credit, only an assessment of your monthly business income to make sure you can afford the payments.
Merchant cash advances are most often used by retail businesses which conventional lenders are often unwilling to serve. The industry was estimated to be funding at least $3 billion a year to small businesses. It is one of a range of creative funding options for small business that allow many businesses to survive in the unfriendly credit environment where conventional lenders are nearly always closed to taking risks on small business.
The Merchant cash advance system was invented and patented around 2004. In the early 2000s, those offering the service were not sure what they were offering. The term “merchant cash advance” had not been invented yet. It was popularized out of a need in the marketplace when the banks fell into an economic climate that made them less and less willing to risk lending to businesses where there was any risk, even though the business were successfully generating monthly cash flow.
Yes. Merchant cash advance providers will look at your daily credit card receivables to determine the amount you are qualified for.
Once you’re approved for the merchant cash advance amount the money will be deposited either as one lump sum into your bank account or as multiple, smaller, monthly deposits.
Most merchant cash advance providers cap your funding to $500,000. This is dependent on the provider you choose.
As a general rule of thumb, merchant cash advance providers will look for at least $5,000 in credit sales each month.
The repayment amount is taken out as a fixed percentage, determined on your daily credit sales.
We recommend reading our Merchants Guide to Funding Options to get a better idea on if a small business loan or merchant cash advance is right for your business.
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