A merchant cash advance is designed for retailers receiving a high proportion of payments via credit card or EFTPOS, such as shops, cafés and restaurants. For these businesses, cash flow can sometimes create difficulties, and funds are needed in a hurry to keep operating, pay debts, meet unexpected expenses, purchase stock, pay employees, undertake marketing campaigns or to act on business goals.
What is a merchant cash advance?
This type of loan is different to traditional loan products, but as a viable and innovative alternative, is becoming more popular option. Essentially, it is a cash advance that assists business with their current cash flow, alleviating any related financial difficulties quickly.
A lender purchases a business’s future cash flow, so future transactions are used to repay the borrowed funds, in addition to a fee charged by the lender for the loan product. The lender takes a percentage (usually up to around 20%) of each future sale the business makes until the debt is fully repaid, called a ‘holdback’.
The fee is set before the cash advance loan is approved and the funds provided, and can be as much as 40% of the funds borrowed. You can borrow anywhere from $5000 up to around $500,000 with a merchant cash advance, with the loan being for a short period, usually up to around 12 months.
4 reasons businesses might choose a merchant cash advance
The major benefits of a merchant cash advance are:
- Simplicity and speed
The paperwork is minimal and the loan can be approved in as little as two hours, and at the most a few weeks. Similar to an unsecured business loan, you can get fast access to funds. The process for traditional business loan approval has a much longer turnaround time.
- It’s easy to qualify
The main reason a merchant cash advance can be approved so quickly, and the funds delivered in such a short time frame, is down to the fact that there are limited credit checks and financial history required. In some cases there are no credit checks or financials needed (especially for smaller amounts), and even if they are carried out, borrowers don’t need a perfect credit score. Instead the lender looks at the business’s income to determine if the funds can be repaid.
- The funds are unsecured
This is a fairly unique feature of this loan. Most other loans require collateral to secure the funds, including business or personal assets, such as a car or property. In the case of a merchant cash advance, however, the borrowed funds are secured by or tied to your future transactions or income, so collateral isn’t required.
- Repayment flexibility
The amount you pay back isn’t fixed, and the loan term isn’t set. Rather repayments are tied to the business’s income since the lender will take a slice of each sale. This means there’s no pressure to pay a significant sum if sales are slow. During these times you’ll pay the loan back at a slower rate, and when it’s busy you’ll repay the loan faster.