Tuesday, April 16, 2024
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Is A Merchant Cash Advance Good For Your Small Business?

Businesses seek financing for various reasons. Notably, they may require some form of funding to maintain operations, expand their business, or kick their business off the ground. And the good thing is that due to technological advances, the financial industry has started to adopt digital transformation to help companies get the business loans they need. 

From traditional financing, businesses today can turn to alternative lending options to qualify for various types of funding. Small business owners who need capital to expand, start a new business, or aim to maintain operations can now get the financing they need through alternative lending sources. While banks are more likely to reject small business loans, alternative lenders offer more flexible qualification criteria. Even small businesses with low credit scores can get funding.

Take alternative lending options like the best merchant cash advances available today as an example. It’s another alternative business loan that helps businesses get the advance funding they need. If traditional bank loans reject your application, you can still find your small business with the help of alternative lenders that offer short-term funding options.

That said, read the information below to know more about merchant cash advances and decide whether it’s a good financing option for your small business.

Conceptual photo about CASH ADVANCE with handwritten phrase.

What Is Merchant Cash Advance And How Does It Work?

A merchant cash advance (MCA) is a short-term loan that allows businesses to pay for expenses like inventory and rent or even pay down debt. This financing option allows you to access funds from your bank account or credit card to cover these costs. It involves business owners selling future revenue for immediate cash. 

That said, it’s an excellent short-term financing option, mainly if your small business can’t get funding from traditional financing sources like banks. When applying for a merchant cash advance, alternative lenders will require your company to have daily credit card transactions from customers and proof of at least three to four months’ history of processing credit cards.

Furthermore, online lenders typically offer merchant cash advances because they don’t require you to visit a branch or use ATMs. That means you can get approved quickly, often within 24 hours. The lender then gives the money directly into your bank account—usually within two business days of approval.

But it’s also worth noting that there are different types of merchant cash advances:

  • Pre-qualification

A pre-qualification is a preliminary assessment of a borrower’s creditworthiness before applying for an actual loan with the same lender. Pre-qualification typically happens online via an application form that must be completed and submitted before being considered for approval.

  • Instant approval

Instant approval means there is no pre-qualification process, and applicants can apply immediately without needing an appraisal or other verification of their financial situation. If approved, they will receive complete funding in their bank account in as little as two business days after they apply online at their leisure.

Why Do You Need A Merchant Cash Advance?

Merchant cash advances are frequently referred to as ‘mini loans’ because they’re available for only a short period—typically between 30 and 60 days. Banks will pay interest rates that vary depending on when you apply for the loan, how much money you want, and how long it takes to approve your application.

Based on the essential points above, you might already have an idea of why your small business could benefit from a merchant cash advance. Nevertheless, here are some reasons why you may need this alternative financing option:

  • You’re Just Getting Started With Your Business

Starting a small business needs careful planning and a leap of faith. Before making any profit, you must cover all your startup expenses, such as your building, equipment, inventory, team member salaries, and other business costs. You may believe you’re prepared at first, only to discover that various business challenges are coming your way. 

For instance, when starting out, you may encounter unexpected small business costs requiring additional funds. In that case, you may apply for a small business loan, only to discover that getting approved is challenging when you’ve only been in business for a short time. But the good news is that a merchant cash advance can be a helpful solution if you’re running a new small business that needs some extra push to get started.

  • You Have a Poor Credit History

One common reason traditional business loans may decline your application is when your credit score is too low. In particular, low business credit scores usually range from 0 to 100. Hence, you may have difficulty getting a business loan if your company’s credit score is below 75. You may also apply as an individual, but your credit score should be around 700 for a small loan and closer to 800 for a small business loan. 

Your credit score is determined by factors such as your credit quality, the amount of available credit you have, and whether you pay your bills promptly. While mismanagement or poor decisions can undoubtedly result in poor credit history, you may also run into other financial challenges beyond your control. But regardless of why you have a low credit score, it’ll not prevent you from getting a merchant cash advance.

  • You Need Immediate Cash

There are several reasons why a small business might need quick money. For instance, one issue that some small businesses face is a need for more funds to purchase new inventory. You may have orders you can’t fulfill because your customers refuse to pay you until you have paid to restock the products they’ve ordered. 

A merchant cash advance is a good option if you’re in this situation or you need money before making profits. With this alternative lending option, you can satisfy your customers while paying your wholesaler or manufacturer. Consequently, you’ll be paid and can repay the merchant cash advance provider.

Conclusion

Overall, a merchant cash advance gives you access to the funding you wouldn’t otherwise have. It’s a short-term loan that can help your small business cover certain expenses. This financing option may be ideal for your small business, particularly if you’re looking for ways to get the money you need to start or expand your business.

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