As a small business, you’re perhaps wondering about some of the best ways to get extra investment for your business. The more money you have, the more you can invest in yourself and what you’re offering, and the more competitive you can become.
However, getting such an investment, especially when you’re just starting out, can be challenging, and you may feel that you’re chasing a lot of loose ends. Nevertheless, many small businesses will eventually come across merchant cash advances.
But are these advances worth the investment? Is it something you should be interested in and paying attention to, or should you steer clear of?
Read on to find out more!
What is a Merchant Cash Advance (MCA)?
So we’re on the same page; what is a merchant cash advance?
A merchant cash advance is a lump-sum payment typically issued by banks or card service merchants and usually offered to small businesses that take credit and debit card payments.
These merchants will provide an initial investment which is then paid back via the financial transactions made by card services, usually as a percentage of all takings over time.
The contract is worked out individually on a per-merchant and per-business basis. The merchant would look at a business’s takings and define how much is needed and how much is affordable for the business to pay back, then come to a definitive agreement.
The interest rates provided on these loans can vary dramatically depending on the companies and merchants. The current financial condition of your business will also play a defining role.
What sets an MCA apart from the rest is the fact that even individuals with poor credit scores could still apply and secure a loan. This is because the merchant has direct access to your takings, so rather than taking your word for how much you’re earning, there are cold, hard facts to decide on.
Are Merchant Cash Advances Worth It?
While the concept behind an MCA can seem worth it, and it can feel like there are a lot of opportunities to have here, you need to be aware of the costs and whether or not it’s right for your business.
There are clear pros.
Firstly, you can get the money directly into your bank account at relatively quick speeds as well. The application processes are usually short, and the lump sum is paid out fast. Unlike traditional loans, you don’t need any collateral, which can also speed up the process.
What’s more, the payback options are usually very flexible. Again, this is because the merchant has access to your card transactions, and since they can see if you’re going through a slower period of sales, they may be able to dial back your payments, and when you’re busy, you can afford to pay more off.
Nevertheless, there are cons you also need to understand.
Perhaps most importantly, they can get expensive, and this is something you absolutely have to pay attention to.
Let’s say you set yourself a high payback amount so you can pay the loan off quickly, but sales start to fall flat. Although you can be flexible with your payment options, that doesn’t mean you’ll be able to keep up with the minimum they expect.
Moreover, since you’re a small business, you will experience more challenging times anyway, and success isn’t guaranteed. If you spent your money on an investment that doesn’t pay off, then this could leave you struggling.
MCAs are also unregulated, or at least not regulated in the same way other traditional loans are regulated.. This means payback amounts tend to be higher than the payback on traditional loans, which can cost you a fortune if you owe more than you can afford. That being said, MCA payback terms are typically shorter than most loans.
As with any kind of loan, if you find yourself in hard times and you’re struggling to make payments, then an MCA could be devastating for your business. It’s a risk you’ll need to consider before taking one out.
All of this being said, MCAs are generally an excellent idea for businesses that are trying to get off the ground and need that extra investment. The risks involved with such a loan are not so different from any other type of loan.
As long as you’re careful, mindful, and organized with what you’re doing, you should be able to set yourself up for a positive MCA experience.