Get a short-term cash injection for your small business
A cash advance is not a loan but rather a commercial transaction where a cash advance provider purchases a set amount of your business’ future sales — typically credit or debit card transactions, as well as sales from checks or deposit transfers. A cash advance is different from a business credit card or line of credit issued by a traditional lender.
Because some lenders have rigorous business loan eligibility parameters, many small businesses have turned to cash advances for their quick capital needs. Although it is easy to qualify for such arrangements, cash advances can exacerbate debt if they are not carefully managed. Cash advances commonly come in two categories.
Cash advances can be given for the purchase of future sales from non-credit or debit card sources — in other words, checks or deposit transfers.
Merchant Cash Advance (MCA) describes receivables financing from credit and debit card sales.
50% to 90% of total outstanding invoices
Daily or weekly payments
1 to 7 days
The business files an application with a cash advance provider. Compared to applying for a traditional business loan, cash advances require much less documentation, but the business needs to provide a history of daily credit card or payment receipts.
The cash advance provider assesses the payment history and determines the risk level of your business, expressed as a factor rate. The higher the factor rate, the more expensive the fees and interest rates for the advance.
One of the following repayment processes will be agreed upon:
The cash advance provider transfers the advance amount to the business’ merchant bank account.
Payments to the cash advance provider begin, often as quickly as the day following the cash advance distribution.
It can be hard to compare factor rates to APRs, but it is an essential step to understanding the true cost of a cash advance, which is often much higher than a traditional loan.
The amount of cash the business is receiving as an advance.
The percentage of daily credit card or other revenue that is withheld from the business and paid to the cash advance provider.
The total amount the business will repay to the cash advance provider.
Cash advances are calculated for total fixed costs and interest rates are not explicitly noted. Instead, a factor rate is determined by the provider based on the risk level it perceives from the business.
It is generally easy for businesses to get approved for a cash advance. Eligibility is primarily based on credit card and sales receipts that typically demonstrate a minimum of at least three months of steady income. Minimum credit score, revenue and time in business requirements often apply, but are lenient.
For a business with no assets to place as collateral or one that is poorly capitalized and ineligible for a traditional business loan or line, a cash advance is one way to get an urgent capital injection. If your business has available collateral, good credit and liquidity, business loans or lines of credit may be more suitable for your financial needs.
The biggest risk in taking a cash advance for your business is in compounding debt. Many businesses opt for a cash advance after being deemed ineligible for any other business loan, putting them in a worse position to make repayment obligations from the start.
Small businesses could find themselves taking out additional advances to cover payments, pushing them further into the red. Remember that although cash advances are convenient in times of immediate financial need, they are also extremely costly. Compare cash advance factor rates and calculate the APR to identify if it makes sense for your business.