How Business Cash Advance Loans Work

culled from:lifehack.org

Business owners who are unable to get access to a significant amount of money and need funding to keep their business afloat may consider using a business cash advance to fund their expenditures. With loans for small business owners being increasingly complicated to obtain, some businesses prefer to go the merchant cash advance route, knowing they can get the money quickly and with less hassle.

Merchant Cash Advances

The tighter environment surrounding business credit means that business cash advances have become a lot bigger over the past five years. Merchants who offer business cash advances will provide the business with a lump sum amount of money that is exchanged for a percentage of future profits. Convenience stores, restaurants, grocery stores and retail stores are the best kinds of businesses for business cash advances.

When a business begins a partnership with a merchant to offer credit card sales to customers, they also get access to cash advances. By offering up 20% of future credit card sales for one or two years, the merchant can get a significant cash advance to keep their business running smoothly.

Loans

Even though merchants will constantly say that these agreements are not business loans, it is important for businesses to treat it in that manner. A cost calculation should be compiled, highlighting how much the loan is going to cost. For example, a store that gets a $50,000 cash advance for 20% of sales for a year needs to know if this is a good deal. That store may be selling $350,000 worth of items each year. 20% of $350,000 is $70,000. This means the business is paying $70,000 to get a $50,000 loan for a year. Can they get a cheaper loan from a bank, or is the merchant cash advance a better deal?

Growing Industry

People who have been observing the business cash advance industry know that it is growing at a rapid rate. Businesses are more inclined to get a merchant cash advance than apply to a bank for a loan. Experts believe this market could be worth between $5 billion to $10 billion over the next ten years.

Many business owners may want to go to a bank and get a loan, but that is not an option. Their business may not be showing enough profits, or they may have a poor credit history. In these cases, the merchant cash advance is the best and only solution. Merchants are willing to lend to people with bad credit, because they know the money will come back through a percentage of future sales.

Irresponsible Lending

Business owners need to watch out for irresponsible lending habits from some merchants. Some merchants will offer huge advances with deals that are not conducive to helping a business in the long run. They will offer these deals so that the business is forced to come back to them for another loan in a year’s time. Businesses need to map out the next four or five years financially before they ask for a business cash advance. Being dependent on these loans every year is not a good idea.

Business cash advances are not as well regulated as bank loans, but they are a real option for businesses that have less than stellar credit. By getting these cash advances, businesses can remain afloat or enact expansion plans.