Running a small business is a balancing act between daily operations and expansion. What happens if you need quick working capital for payroll inventory or a sudden opportunity? Here is where the small business cash advances– a quick infusion of working capital for your business, usually faster and with fewer barriers than a traditional loan.
What is a Small Business Cash Advance?
Unlike the traditional loans, a small business cash advance is just an advance of a lump sum for a working capital requirement against a percentage of future revenues of a business, usually credit card or debit card sales. As a source of short-term financing, it is utilized mostly by companies in urgent need of cash and that may have been unable to qualify for conventional bank loans because of a low credit rating or lack of security.
Basically, the lender gives you a certain amount upfront. Then you pay back the monies plus fees through gradual daily or weekly deductions from your sales until the full amount has been paid off.
Features and Benefits
Why do many entrepreneurs consider cash advances for small businesses an advantage? Let us simply picture these reasons:
1. Flexibility
Instead of making payments based upon fixed monthly installments, repayment is based on revenues. So, if you have a slow month, your payment goes down, which helps seasonal businesses.
2. No Collateral Required
Most merchant cash advances for small business providers do not require collateral, which keeps risk from the hands of the business owner.
3. Minimal Credit Impact
Usually, the bigger perk is that your credit score has little to do with whether or not you get approved. A number of lenders are more concerned about your sales volume and cash flow instead of credit history.
4. Fast Funding
Funding can be arranged after an application is approved in as little as 24 to 48 hours. Being fast-tracked on funding might make a significant, if not world-changing difference.
The Merchant Cash Advance: The Advantages and Disadvantages
Each of these financing arrangements comes with its set of ups and downs; so goes the merchant cash advance for small business borrowing. The benefits and challenges are these:
Advantages:
– One can receive working capital very fast
– Repayment is flexible, i.e., dependent upon the performance of the business
– Easier approval for a person who has poor credit history
– There is no need for anyone of the usual collateral types
Disadvantages:
– The cost charged is very high, in comparison with a regular loan
– Lacking a clearly quoted APR, making it difficult to translate into an actual dollar amount for all its fees
– Being deducted from one’s cash flow every day or week could pose a burden
– Regulatory control is either weak or nonexistent, depending on the jurisdiction
Make sure you understand what you’re getting into before you sign anything-this is particularly important because repayment can impact your operating budget more than you expected.
How to Get a Small Business Cash Advance
Deciding whether to get a small business cash advance, the procedure is fairly simple but can differ somewhat depending on the provider.
Step 1: Application and Approval
Start by identifying a reputable lender. Typically, they will ask you for your business bank statements, some merchant account details, maybe some sales reports from the last three months or so. Whereas traditional bank loans can take weeks to be processed, it usually only takes a day or two for some cash advances for small businesses to be approved.
Step 2: Receiving the Advance
After approval, you will be issued a lump sum directly into your business account. This is cash you will repay through daily deductions from your sales.
Step 3: Repayment
The lender collects a fixed percentage of your daily credit or debit card sales until the entire principal plus fees are repaid. An automatic method such as this offers a predictable repayment period, so just be sure to have enough cash flow during downtimes for those deductions.
Step 4: Getting to Know Fees and Interest
One of the most important things you want to clarify prior to committing to a small business cash advance is the factor rate, a number typically ranging somewhere between 1.1 and 1.5 that tells you how much you will repay, altogether. For example, if you get $10,000 at a factor rate of 1.3, you will pay $13,000 in total for the life of that advance.
This differs from establishing the interest rate or from APR, which brings about why comparing a business advance with a conventional loan is so difficult. Hence, request the lender to put it into plain terms.
Final Thoughts
Agility is everything in the world of startups and entrepreneurship. A fast, cash advance for small businesses gives those needing quick and flexible funding the best option as opposed to the rigorous terms of bank loans. This should, however, be used wisely and only if you understand the terms thoroughly.
Having a merchant cash advance for a small business at your disposal for short-term bridging gaps or furthering grand business moves gives you an edge to stay ahead of others. We hope you enjoyed this article, and it has been helpful in understanding small business cash advance!
