Is a Merchant Cash Advance Right for My Business?

There are dozens of financing alternatives available to today’s business owners. Your answers to these questions can help you decide whether a merchant cash advance is right for your business.
Merchant cash advance financing once thought of as an alternative, is now firmly entrenched in the business financing landscape, having served hundreds of thousands of business owners well over the past decade.

While nearly any type of business can use this type of financing, the factors that distinguish merchant cash advances from bank loans may make this type of financing more or less ideal for your business right now.

1. Can You Qualify?

Bank loans are approved based on an underwriting process that evaluates your application based on many factors; including:

• length of time in business (usually at least two years or more)
• bank statements (evaluating cash flow, NSFs, deposits, and withdrawals, etc.)
• credit score (personal and business scores)
• perceived ability to repay (cash flow, business plan, and sales forecasts)
• investments, personal and business collateral, etc. (how the bank will recoup its money if you default on the loan)

If your business cannot meet the bank’s minimum in any one of these areas, or even if you simply prefer not to leverage capital in order to obtain financing, your company might not qualify for a bank loan. Merchant cash advance financing could be an ideal way to finance a young business or a company that has the ability to repay the amount but for one reason or another may not qualify for bank financing.

2. Do You Know How Much Money You Need?

Because the cost of financing is relatively low, bank loans are rarely granted for smaller sums. If you only want a small amount of additional working capital, don’t know how much money you actually need, or would prefer to take out only that portion of the financing needed, merchant cash advance financing could be more suitable than a bank loan in a given instance.

3. How Soon Do You Need the Money?

The underwriting process for a bank loan can take weeks or even months and approval rates are low since so many criteria must be satisfied. If you’re looking for working capital to support expansion or capital projects for your long-range plan, the lower price tag that accompanies bank financing could make it worth the wait. If you need working capital within a matter of days (or even hours) in order to take advantage of a fast-emerging opportunity or emergency situation, a merchant cash advance might be ideal.

4. What’s Your Plan for Growth?

Any type of financing which must be repaid will affect your company’s cash flow. Bank loans typically have a much longer repayment term than merchant cash advances and a lower interest rate. If you aren’t going to use the financing in a way that will allow you to increase revenue, a bank loan might be more appropriate for your business. Conversely, if you are using the financing to grow your business more quickly, a merchant cash advance might be equally if not more appropriate since you can repay the amount much more quickly (and eliminate business debt) out of the increased cash flow that accompanies growth.

5. How Much Flexibility Do You Need?

As mentioned previously, the underwriting process that precludes business loan approval also determines exactly how much working capital will be made available to your business, what the money can be used for, and how repayment will occur. While some capital investments and improvements can be planned and executed precisely, other initiatives require financing programs that are flexible, renewable, and can be used at your discretion.

Merchant cash advance financing is far more flexible than a bank loan. Once approval is granted, you may even have the ability to draw on the amount approved as-needed (as well as in a lump sum), enabling you to control costs and minimize debt. Merchant cash advance financing can be used for nearly any business purpose and most lenders are happy to tailor a program that suits your company’s financial needs both in terms of the amount of money available and repayment terms.

Plus, once a certain threshold of repayment is met, you will usually be able to draw out more capital if needed. This can be especially helpful in the case where your business needs working capital for a long-term project but may not qualify for the total amount needed at the beginning. By paying down the original amount, you make more working capital available for your project and you can use financing on an incremental basis over time, when and where it’s needed.

Every business financing tool has its own set of particular characteristics. Since every business also has unique characteristics and financing needs, it’s important for business owners to evaluate their needs carefully in order to choose the financing program that feels like the best fit. In addition to asking questions about the various funding options available, don’t forget to ask yourself these questions so that you can find out which option your business really needs.