For a long time businesses have been able to take advantages of loans to boost their cash flow and grow their business. However, business size plays a key role as to whether a business is eligible to receive a loan or not, which leaves smaller businesses and startups out in the cold.
This is where merchant cash advances come in. Devoid of the extensive terms and standard restrictions associated with the more traditional lenders, merchant cash advances allow smaller businesses to borrow money and pay it back over a reasonable course of time.
Before we explore the pros and cons of merchant cash advances, it’s worth considering the following:
The Pros of Merchant Cash Advances
As already discussed, merchant cash advances can be beneficial to businesses, especially smaller ones:
The loan is more accessible than traditional loans
Merchant cash advances do not require a business to have any assets, meaning new or smaller businesses are able to apply for them. There’s also fewer requirements for a business to meet to be eligible for the loan. The standard funding criteria is:
- An average of approximately £3,500 worth of card sales each month
- 12 months of card statements available to be reviewed
- A minimum of three trade references
- Verification that you are up-to-date with your rent and have at least 12 months left on your contract
- Proof of a good working relationship with your card terminal provider
The finance on offer is flexible and scalable
What’s great about merchant cash advances is that you only have to pay it when you are paid. The repayment is worked out as a percentage of your revenue. So, if your business is having a quieter patch, your loan repayment will reflect this. At the same time, if your business is busier, you will pay back more of your loan.
Why is this a good thing? Because there’s no fixed repayment plan, you’ll always be confident that you’ll be able to make the repayments.
The repayment process is simple, and involves minimal input from the customer
The case with many loans is that the repayment process is a daunting experience. Meeting the minimum repayment quota each month can be hard, and a business owner may struggle to make ends meet.
With merchant cash advances, this is not the case.
Repayment is arranged between the lender and your card terminal provider, and comes directly from payments you receive. As the repayment is taken directly from the payment source, no input is required from you, mean you don’t need to spend time worrying about repayment.
So paying back a merchant cash advance is a walk in the park.
You are able to use more than one line of finance at one time
A lot of traditional lenders will tie you into a contract that prevents you from taking out any other loan at the same time. Another benefit of merchant cash advances is that it is also possible to access other types of financing for your business at the same time.
This can be useful as, should you already be using a loan to support one part of your business, you can use a merchant cash advance to aid you in another of to give your cash flow a general boost at the same time.
The Cons of Merchant Cash Advances
As with any form of money borrowing, there are some cons to merchant cash advances you should be aware of:
The amount you can receive is dependent on your monthly turnover
Whilst more accessible, the amount of money you are able to access from a merchant cash advance is limited.
Typically the lender will not be able to accommodate a request for a large loan; it is rare that they can lend anything over £10,000, and many only offer up to £1,000.
The loan amount will also depend on the annual turnover of your business. If your turnover is relatively low, the merchant cash advance amount open to you will be limited. So, if you are looking to receive a significant cash flow injection, you may have to consider another option. As previously mentioned, it is possible to have other loans running alongside a merchant cash advance, so you do not need to rule this out as an option completely.
They are only applicable for businesses who take payments via a card terminal
Possibly the biggest requirement for a business to receive a merchant cash advance i that they have to use a card terminal to take at least some of their payments.
Repayment is taken by the lender through payments made to your business via a card terminal. So, if your business doesn’t use a card terminal at all, merchant cash advances are not for you.
It is also worth noting at this point that, if you only take a small amount of payments into your business in this manner, you’ll only be applicable to receive a small loan amount.
Their repayment system only works on certain card terminals
On top of the above, merchant cash advances only work on certain card terminals. The good news here, however, is that more and more card terminal providers are working with lenders, making this kind of loan accessible to more businesses.
Our advice is to ask what card terminal providers a lender works with whilst doing your research.
The APR can be significantly higher than that of a standard business loan
Because this kind of loan does not require you to have any assets, a good credit rating, reserves of personal guarantees, the APR can be significantly higher than that of other, more traditional business loans.
As long as you know the APR before you commit to the loan, and are certain you will be able to pay this on top of the loan amount, you will be fine to receive a merchant cash advance.
You can work out exactly what you will by paying back using this useful Merchant Cash Advance APR Calculator.
How Can I Access a Merchant Cash Advance?
There are many lenders who offer merchant cash advances, one of which is PayPal. Read the article below to find out more about the loan they offer to businesses.