Advantages and Disadvantages of merchant cash advances

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Written by Michael Foote , founder of Quote Goat, with over 13 years experience working in the finance, insurance and currency sectors.
07/05/2020

Alternative small business financing routes such as invoice finance are highly sought after in the current economy. With the growing difficulty in securing conventional bank loans and the requirement for funding in order to help most small businesses survive and t grow, plenty of new routes for lending have sprouted up, one of those is named merchant cash advance.

This works for small businesses by receiving a cash advance that they pay back incrementally through a percentage of each of their credit and debit card payments until they have paid back the amount lent plus interest.

This is a great option for businesses that see a lot of small card transactions done throughout business hours. But there are advantages and some disadvantages to this route:

Advantages

Easy to set up

Most merchant cash advances are set up within a week and some can be done within a few days, meaning small businesses in vital need of funds can have money in their bank incredibly quickly. This is perfect if a business has a cash need or is presented with a rare opportunity for investment and lacks the required capital.

Credit requirements aren’t as strict

Unlike a conventional bank loan a merchant cash advance doesn’t require you to have a perfect credit score. Most small businesses have little to no credit information purely because they haven’t been operating for very long.

High approval rating

Unlike other financing routes, merchant cash advances have a very high approval rate. Most simply require an application, a government ID and a few months of bank statements to ensure your income is stable.

Disadvantages

Can be expensive

Unfortunately, when compared to other products on the market merchant cash advances are relatively expensive. The repayments are spaced over a short period of time and you may expect to pay anywhere from 9-50% over the amount of your funding.

Short term solution

Merchant cash advances are only a short-term solution. They are only made for between 3-15 months at a time, which is why the repayments are so expensive. Therefore, it is advised that small business only use this type of lending for a short-term option rather than trying to use it for any long-term plans.

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