Merchant cash advances have been gaining in popularity as an alternative lending source to small business as credit remains tight. Big players like Amazon and American Express are getting into the business. Many businesses that have used a merchant advance in the past use the product over and over to even out cash flow. But some businesses have nothing good to say about a merchant cash advance. Why the negative press? Because a merchant cash advance is not a one-size-fits-all solution and does not benefit every business and every business situation requiring an influx of capital.
Here are a few business profiles that may not qualify and should not consider a merchant cash advance:
You’re a brand new start up.
If you’ve been in business for less than a year, a merchant cash advance may not be the right way to fund your growth for two reasons. The first reason is that the lion’s share of merchant cash advance providers require at least one year’s worth of statements in order to qualify your business. The second is that many also require a certain minimum threshold of monthly sales, which a new business with little to no clientele would have a hard time meeting.
You don’t accept credit cards or your business is largely cash-based.
A merchant cash advance is essentially an upfront payment for future sales – specifically, credit card and/or debit card sales. The advance is repaid by recovering a small percentage of card sales each month as the transaction goes through your credit card processor – prior to deposit in your bank account. The card processor statements also provide a way to verify sales and see sales trends within the past 12 months. If there are no credit card sales, verification and repayment of a merchant cash advance is pretty much off the table.
You have razor-thin margins and low volume.
Thin margins alone are not a terrible thing. Some businesses make their profits on volumes and not on large margins. If you’re a low-cost or discount provider or if your business is in a highly competitive industry, you may fit this description. But when you combine thin margins with low volume sales, a merchant cash advance could cripple your cash flow. If your sales are lower than predicted when the advance was calculated, then you may not be left with enough cash to cover business expenses and the advance repayment.
Your business is in trouble.
A merchant advance is not a restructuring loan. A restructuring loan typically lowers monthly payments and extends the repayment period. A restructuring loan may also require mediation – and an agreed upon strategy detailing how funds are to be used and changes required in the business. A merchant advance not a loan. It’s a short-term funding solution that offers hassle-free financing at a premium cost for the convenience. It does not require a business plan or a set out use for the funds. It will increase your short-term costs – which will not help a failing business.
You do not understand how a merchant advance works.
A merchant cash advance is not suited for every financial need. It’s not a vehicle to be used as a savings mechanism for your business. It’s best suited to help with investments in your business with a measureable ROI, and not personal purchases. A merchant advance can be part of your business financing mix but will not be the only solution. If you don’t understand how a merchant advance works, or the best business situations for this type of funding, you may be putting your business at risk. While a merchant cash advance provider should take the time to understand your business and your needs, they cannot know all the details of your situation. Part of the onus is on you, the business owner, to make sure that you understand the product and the effect it will have on your business.
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