A merchant cash advance is a short-term loan that is aimed to provide a small amount of cash to borrowers compared to other longer term loans. Such a loan option is best defined as an arrangement where cash is lent out to the borrower in advance, which is linked to the borrowing business’s credit card sales.
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How does it help?
A merchant cash advance lets the business owner take a quick loan in exchange for a fee and acceptance of repaying the principle. The lender usually takes a cut from the business’s credit card sales each day until the whole amount is repaid. The duration of this loan could range between 4 and 18 months.
Since the borrower is required to pay a fixed percentage of credit card revenues each day, the actual re-paid sum is lower during sluggish months.
Costs
Though a merchant cash advance can get approved within days, it typically involves a high rate of interest. For instance, fees on such advances can range from 15% to 80% on an annual basis on the amount funded. A higher fixed percentage on credit card sales will imply a shorter length of repayment.
Meant For Which Businesses?
A merchant cash advance is meant for those businesses who see a large flow of revenues through credit cards. For instance, restaurants and retail stores are some business verticals that are highly dependent on purchases through credit cards. Businesses that fail to qualify for loans from traditional banks can borrow using this route.
Benefits
Merchant cash advances offer a number of benefits such as fast disbursement of cash and extension of the loan to borrowers with a poor credit score. This option does not require minimum monthly payments, and there are no limits placed on usage of cash.
Drawbacks
This type of loan charges higher fees than other traditional loans. A borrower does not have the option to change merchant service providers. Moreover, the fixed percentage of deduction on credit card receipts can trim a business’s cash flow.