What Is a Merchant Cash Advance?

Obtaining business funding has become increasingly difficult throughout the years. As the economic climate worsens across the U.S., and on a global scale, lenders are less likely to freely distribute funding, and investors are not as willing to take a chance on seemingly risky business ventures. So how do you obtain business funding in such a climate? Personal financing is risky, and not an option for the majority. A fairly new option that has become increasingly popular within the past few years is the merchant cash advance.

Merchant cash advances, the purchase and sale of future income, are often used as an alternative to traditional financing, but many view this as an option that is as good as, or better than, many available traditional financing options, due to the flexible nature of the advances.

How it works
Merchant cash advances provide business owners with immediate access to working capital in exchange for the promise of a share of future sales. Since the lender will receive funds from all future sales until the debt is repaid, there is no real collateral involved. This option has gained popularity due to the fact that debt repayment is not on a fixed schedule, but rather based upon current sales. This flexible payment schedule is attractive, particularly when future sales are unpredictable. Lenders for this type of financing are also much less choosey than a bank or venture capitalists.

While this option may sound appealing, there are certain criticisms to consider. Interest rates vary by company, but can be extremely high. In addition, since this industry is fairly new (less than ten years old), it is virtually unregulated. It is also important to consider the fact that while unpredictable future payments may be an advantage when times are rough, if you have unusually high sales for a period, your payments will also be unusually high as well.

As with any method of obtaining funding for your business, it is critical that you fully understand the terms of the agreement before you decide to take action. While it may be easy to obtain funding through a merchant cash advance, it should be treated like a loan. Be proactive and closely monitor interest rates.