Businesses need money to grow and expand, and when that money isn't readily available from cash flow, many businesses turn to loans. Unfortunately, some businesses, particularly new or small businesses, don't qualify for traditional bank loans. For these cases, there are merchant cash advances.
A merchant cash advance is somewhat like a payday loan—money is given based on receivables and is paid back, in addition to a fee, when those receivables are collected. In the case of a payday loan, the receivable is a paycheck. In the case of a business cash advance, the receivables are consumers' credit card debts.
It is important to note that a cash advance loan is not the same as a bank loan. A bank loan is usually paid back, with interest, by a certain date via fixed monthly installments. A cash advance, on the other hand, is repaid, plus a fee, out of actual income. In the case of a merchant advance, repayment is made from credit card sales the merchant receives. Usually, the cash advance vendor will take an agreed-upon percentage of the accrued credit card sales each period (weekly, biweekly or monthly) until the loan is paid.
If your business needs money fast, a cash advance may be the best way to get it. Merchant cash advances can often be processed in a matter of days, and the requirements are generally more lax than those for bank loans. Plus, because repayment is taken from actual sales, you don't have to worry about covering a big fixed payment in a slow month.
Some vendors prefer fixed repayment terms like those charged by banks—avoid these. Also avoid vendors who can't or won't waive initial costs and closing fees to keep the price down.
Know how much funding you require and what the money will be used for. You should also have an idea of how much your business makes each month and what portion of that is from credit card sales.
Look for a vendor who has experience lending to your type of business, and make sure the vendor follows the laws regarding cash advances in your state. Of course, to do this, you will have to know them, too. Knowing the rules can keep you from paying exorbitant fees or otherwise being taken advantage of.
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