What Is a Merchant Cash Advance?

A Merchant Cash Advance is an unsecured alternative to a small business loan. However, a cash advance differs from a small business loan in many ways.

It is important not to confuse the two. Read the terms carefully and consider how each one affects your business situation before applying for either a conventional loan or a merchant cash advance.Applying for a conventional small business loan takes time you may not have if you need capital right away to take advantage of an opportunity or to cover an emergency; funding, once approved, may take several weeks; approval will depend on a satisfactory FICO^TM score, your collateral, and other factors. As a result, applicants with less-than-perfect credit are often denied a conventional loan. Owners of new or “high-risk” businesses are at a disadvantage.

A merchant cash advance, on the other hand, is not a loan—it’s an advance based on your business’ future credit card sales, primarily those made through Visa and MasterCard. The approval process is quick and easy. In fact, the majority of applicants—even those with bad credit—are approved and funded in less than two weeks. No application fees or hidden charges are involved. However, business owners should know that the cost of merchant advances is much higher than the cost of a conventional loan. Furthermore, this industry is not yet governed by regulatory agencies.

To be granted a merchant cash advance, a business must have credit and debit card sale transactions of a certain minimum amount each month. Unlike a standard business loan, the monthly repayment is based on a percentage of the credit card business transacted each month. This allows payments to fluctuate depending on the business’ monthly sales. This flexibility can be an attractive feature for cash-strapped business owners.

Small business owners who need fast financing will welcome the growing number of merchant cash advance companies in this tight credit market. However, you should thoroughly investigate all aspects of a merchant cash advance before applying.