There are times when a small business may be having a cash flow problem, and lack the necessary funds to buy inventory, pay their employees, buy new equipment or increase their space. In situations such as these a business cash advance may provide a solution to that temporary cash flow problem.
What is A Business Cash Advance
A business cash advance is not really a loan, but rather an advance based on a business’s future earnings. There are basically two types of cash advances for businesses. One is called MCA (Merchant Cash Advance) and is based on on a businesses credit card sales. These types of advances are normally given to businesses whose sales come primarily from credit cards such as various types of retail shops or restaurants.
The other type of business cash advance is known as ACH (automatic clearing house withdrawals) and this advance while based on income the company has made in the past and an estimate of future sales and not is not dependent on credit card sales. Both of these loans are considered “unsecured” business loans and can be attained with bad credit or no credit.
Unlike a typical business loan that require monthly payments a Cash Advance for business requires you to make daily or weekly payments plus fees. Naturally, a well timed loan can get your business booming and increase margins, so keep reading to find out which advance is right for you.
What is The Major Difference Between a Traditional MCA and ACH.
There are some major difference between a traditional MCA and an ACH. In an ACH the amount of the daily or weekly payback is a set amount as is the length of time you have to pay back the loan. Regardless of how well your business is going the amount of repayment and length of loan remains the same.
On the traditional MCA based on credit card sales the amount of the weekly payback fluctuates. If you make a lot of credit card sales your payback amount will come to more and the length of time you are paying back the advance is shortened. If your credit cards sales are less than expected one week the amount of the payback is less and the length of time you are making payments on the advance may be longer than predicted.
Why A Business May Choose An MCA
There are some good reasons why a small business may consider applying for a Merchant Cash Advance loan. These reasons include:
- A business needs to get money quickly and traditional loans take a long time to go through. With a MCA you can money fast usually within a week.
- A business may not have the credit to qualify for a traditional loan. MCAs are often given to businesses who have bad credit, but whose business is bringing in good income.
- An MCA is unsecured so if you fail to repay the loan you won’t risk losing your home.
Why Business Owners Should Think Twice About Taking An MCA
There are some things you need to consider when considering taking an MCA to meet your cash flow needs. Here are some things you need to think about:
- The APR on these Merchant Cash Advances are incredibly high normally running between 40% and 350%.
- There is no benefit to the business in paying off the loan faster.
- Due to the high interest and other fee MCAs may put a business into a debt cycle where they need to take out another MCA before the first one is paid off.
If you are a small business owner and considering an MCA it would be advisable to explore other options before making a final decision.