When you have your own business, there are times when you need an infusion of cash ASAP. When such a situation comes up, approaching a bank is often an exercise in futility.
There are several reasons why applying for a bank loan may not be ideal for your situation. For example, your business may be new. You may also not have enough equity which means you don’t have collateral needed for a loan. A bank loan application also takes a few weeks to process even if you do get the loan in the end, and the more time you waste waiting for your loan to be approved, the more money you lose.
But you don’t have to rely on a bank loan to get the money you need. One increasingly popular alternative is merchant cash advance.
How a Merchant Cash Advance Works
A merchant cash advance is not a loan, so the cash advance premiums can be very expensive. Usually, a merchant cash advance must be paid within two years, and sometimes the lender may only give you a year to pay back the advance.
Unlike a loan which usually requires a set amount every month, the payment for an advance is often dependent on the amount of credit card business you do on a daily basis. That means you don’t have to worry about making the payment each month.
Merchant Cash Advance Case Study
Here’s a real-life scenario of a merchant cash advance agreement. Calderon puts $700K of his own money for a restaurant business, and his business partners chipped in another $500K. He thought he was all set, but construction costs for the new restaurant went over budget by $80K, and that really cut down his operating capital.
Calderon needed the $80K quickly, and the bank loan required a waiting period of 4 to 5 weeks. The merchant cash advance, on the other hand, was available within 48 hours of applying. He only needed to prove that his business did $40K of sales a month, after which the funding company checked his credit and his business agreement with his partners, and the advance was already available.
Calderon received his $80K, and agreed to pay back $100K. The funder took 12% of his daily credit card sales until the entire amount was paid off.
Pros and Cons
As the case study illustrates, a merchant cash advance is very easy to get and it’s quick too. What’s more, the payment amount isn’t set in stone, so when business is slow then the amount that will need to be paid is expectedly lower.
But then again, the markup can also be very high, so the first rule for you is to shop around so you can get the best rates. You should also make sure that your business makes enough sales so you can still operate with the money you have left. With Calderon, the remaining 88% of his daily sales had to cover his other business expenses.
The funder will always be paid first, so you need to make sure the money you have left can cover utilities, payroll, and inventory, and equipment maintenance. If you can’t cover these expenses, you may not have much of a business left.