A merchant advance is a fast way for a small business to raise capital. That may sound great if your struggling company needs business cash fast. It may sound even better when you learn that your bad credit won’t stop you from qualifying for a merchant cash advance. And best of all merchant cash advances do NOT show up on your credit report. That means you can still look for other business capital after you get your merchant cash.
It all sounds great … Right? Unfortunately life is never that simple. You may be able to get a merchant advance. The problem is you may not be able to afford to pay back the merchant cash advance that you take. Merchant funding companies advance you money based on your monthly credit card sales. These are the sales that go through your merchant terminal … that’s why this type of cash advance is called a Merchant Advance or a Merchant Cash Advance.
Every business owner struggles with the question: “What is the best way to raise money for my business?” In perfect times, if you have good credit, the answer is easy. Go to the bank and get a Line of Credit or a loan. Think “Cheap Rates” and low cost capital.
Sadly, the financial world is in chaos right now … and probably will be for some years to come. Even if you have great credit and a strong business balance sheet, you will find it difficult, if not impossible to borrow business capital. The only solution may be to consider a merchant cash advance.
Fact: Merchant Cash is VERY expensive money! You need to carefully weigh all of your options before signing for a merchant advance. Can you stay in business without getting cash now? If you know you can survive without “expensive” cash advance money that is probably your best bet.
However, if you absolutely must have additional funds to keep your doors open or expand, then a merchant advance may be your best or only option. The key is you need to carefully evaluate your current and projected monthly cash flow before you dive in. You will be required to pay back a fixed percentage of your merchant terminal sales each month until you have paid off your advance.
A good rule of thumb is to try to use merchant cash for anything that most likely will increase your sales. For example: a new piece of equipment that will add a new income stream to your business probably will be a good idea. The same logic can be applied to a new system that reduces costs and adds net income to your bottom line. These types of investments may increase revenue significantly enough to easily justify the higher costs of a merchant advance.
It does not make sense to take a merchant cash advance for an expensive vacation or to pay off lower interest loans. Try to focus on absolutely essential “survival” expenses or low risk expansion plans when you consider a merchant advance. Take only what you really need.
You need to seriously consider the Risk-Reward questions BEFORE signing up for a merchant advance. In some cases, merchant cash may push your under capitalized poor performing business over the cliff and send you into bankruptcy. In many other cases, a cash advance may be the only option you have to save or grow your business.
Read also about the answers to how do I get out of debt.