Before you can pursue a merchant cash advance for your small business funding needs, you’ll need to understand some basics about how they work, their advantages and disadvantages, typical qualifications, and what kind of businesses can benefit from this form of merchant funding.
Once you understand all those aspects of a merchant cash advance, you can compare rates and services available from lenders like BizFly Funding, to find the right option to fit your small business funding needs. To that end, we answer some common questions about merchant cash advances in our guide below.
How Does a Merchant Cash Advance Work?
A merchant cash advance is similar to a loan, in that it provides business owners with an up-front lump-sum amount of funds that they can use as they see fit. However, most traditional quick small business loans have a fixed duration or term, and require regular repayments every day, week, or month during the term at a fixed amount of money.
This can place a financial burden on businesses where their cash flow, income, and receipts are highly seasonal, variable, or cyclical. Being able to make repayments on time when sales are down can be a big challenge.
A merchant cash advance removes that particular challenge, by taking repayments automatically as a percentage of future credit card sales. This means the repayment amount is directly tied to the amount of sales, and variable based on sales. If business slows down, repayments slow down. If business picks up, repayments pick up.
This reduces the risk and burden of repayment on the part of business owners, while also reducing some of the risks on the lender. As such, there are usually only minimal requirements to qualify for a merchant cash advance, though the factor rate (like an interest rate) can be higher than with a traditional quick small business loan since the repayment term isn’t tied to a calendar date.
What are the Advantages of Merchant Funding with a Merchant Cash Advance?
Merchant cash advances can provide merchant funding to small businesses quickly and easily, and are relatively easy to qualify for (compared to other small business funding options). In general, the key advantages to a merchant cash advance are:
- Fast and easy application process, that looks at time in business and revenue as the primary considerations (along with credit score and other factors).
- Quick funding, with most lenders offering merchant cash advances within days of application, and many businesses who choose BizFly Funding receiving their funds within 1 business day.
- No negative credit score impact, since a merchant cash advance isn’t a traditional loan.
- Potential for positive credit score impact, if merchant cash advance funds are used to pay bills that would otherwise be late/to collections, consolidate debt, or other credit-improving uses.
- Automatic repayment through credit card sales, so there are no monthly payments or manual remits to be made to the lender, saving business owners time and money.
- Repayments based on credit card sales, so no negative impact to cash flow in the same way that fixed, non-related traditional loan repayments can have.
What are the Disadvantages or Drawbacks of Merchant Cash Advances?
There are only a few drawbacks to merchant cash advances as a viable form of merchant funding. The interest rate (factor rate) tends to be higher than traditional quick small business loans or other loan-based financing options, since the time to repayment is variable, there are no collateral requirements, and the lender isn’t getting the money back on a fixed schedule.
The other key drawback is not dissimilar from other forms of credit or loans – repayment comes out of your generated sales and revenue, meaning repaying the merchant cash advance can chew up a lot of your ordinary business revenue during the periods when you are repaying it. But that can be said of any loan or credit product – businesses should always use caution and borrow responsibly.
Can I Qualify for Merchant Cash Advance Business Funding with Bad Credit?
Merchant cash advances are often available even for businesses with bad credit. In fact, they are one of the top options for business funding with bad credit that most sales-focused small businesses can obtain.
Because of the nature of the repayment, being tied to credit card sales, lenders (especially non-bank lenders) can relax some of the traditional credit score requirements that are associated with most loans or line of credit products. This means merchant cash advances can be easier to obtain for bad credit customers, and are often one of the only types of credit that are available to businesses with very bad credit scores.
What Kinds of Businesses are Best Suited to Use a Merchant Cash Advance?
Merchant cash advances are well-suited to businesses that do a lot of credit card sales. Since the repayment comes from credit card sales, it is essential that you have revenue in this form in order to make use of a merchant cash advance. Therefore, the best applications are often in restaurants, retail establishments, boutique shops, everyday service businesses like nail salons, spas, and so on.
The hospitality industry is also a common sector that can utilize merchant cash advances easily and effectively. Individual small businesses, such as general contractors/handymen can also benefit, as can larger service businesses like auto garages and even some forms of healthcare providers. So long as your business derives a good portion of its income from credit card receipts – even if those receipts are highly variable – a merchant cash advance may be an ideal choice of small business funding option for you.
Small Business Funding with BizFly Funding
BizFly Funding offers a full range of small business funding options, including merchant cash advances. Whether you need a merchant cash advance to help manage your cash flow and pursue opportunities for growth and increased sales, or are looking for a traditional quick small business loan or line of credit product, BizFly Funding offers quick and easy applications, affordable and competitive rates, and can often provide funding in as little as 1 business day following approval.
Depending on the time in business, revenue, and credit score of your business, you can qualify for up to $1,000,000 of small business funding with some of our products, including up to $250,000 in a merchant cash advance. Find out more on our website about the qualification requirements, and get pre-approved or approved quickly and easily with our online application.