4 Benefits of a Merchant Cash Advance

A merchant cash advance, which pre-pays businesses for their credit card receipts, can help many small businesses obtain needed funding when they might not qualify for traditional loans. The following information will explain how a merchant cash advance works and the potential benefits to your business.

Benefit No. 1: It Is Not a Loan

A merchant cash advance is different from traditional borrowing because it is not really borrowing at all. If you run a business that accepts credit cards, a merchant cash advance company - often called a factoring company - gives you money for the right to collect future credit card receipts.

A traditional loan has an interest rate so that you pay back more than you initially borrowed. That’s how the lender makes money. With a merchant cash advance, the factoring company makes money by giving you less than the total amount they will collect from your credit card sales. If you equate the fee collected by the merchant cash advance company to interest, it can be equal to a high interest rate. But for many small businesses, a merchant cash advance is worth the price because other forms of funding are difficult to obtain.

Benefit No. 2: Credit History Is Less Important

In a traditional loan, one of the first things a lender looks at is your credit score, which is determined in large part by your credit history. A negative credit history lowers your credit score and makes it more expensive or impossible for you to borrow. But a limited credit history has the same effect. If your business is new or you have never needed financing and so have little or no credit history, it will be more difficult to borrow.

With a merchant cash advance, the factoring company often will deal with businesses with only a 60-day history of credit card sales. The factoring company already knows the general risks associated with collecting on major credit cards and so needs less of your business’ individual history to determine if they can make money by advancing you money against your receivables.

Benefit No. 3: Less Security Required

Lenders speak of the Five “C’s” they want potential borrowers to have: capacity to repay, good character (or reputation), good loan condition, capital in the business and collateral. Often, for the new borrower or small business borrower, more collateral or security is required to offset the risk to the lender.

With a merchant cash advance, your credit card receivables are the security the factoring company needs.

Benefit No. 4: Less Risk for You

In a traditional loan, you share risk with the lender. If you cannot repay, the lender can take whatever you have put up as security and can take legal action to force you to pay the balance. In either case, your credit rating is negatively impacted.

With a merchant cash advance, the factoring company that advances you the money takes the risk. Again, a merchant cash advance is not a loan. Funds are advanced to you and the company then collects credit card sales due you.