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3 things business owners should know about merchant cash advances

On Behalf of | Mar 16, 2024 | Merchant Cash Advances

There are many ways for businesses to finance unexpected facility repairs or to cover budgetary shortfalls. One option that a company might consider is a merchant cash advance.

If an organization regularly processes credit card payments, it may be possible to leverage future credit card revenue to secure immediate financial support for the business. Merchant cash advances can seem like a great solution for a business with a temporary financial issue. Before agreeing to a merchant cash advance, business owners and executives should familiarize themselves with the concerns introduced below.

Merchant cash advances aren’t loans

Unlike many forms of financing, a merchant cash advance isn’t technically a loan. Instead, it is an agreement to sell future credit card revenue to a financial business. A merchant cash advance does not help establish or build the company’s credit score because it isn’t a loan.

Merchant cash advances are often expensive

Business loans can be more expensive than other types of financing. Merchant cash advances are among the more expensive options for securing funding for a business during times of financial hardship. The company may assess a factor rate in lieu of interest that can increase what the borrowing business owes. What seems convenient can actually end up pushing a business further into financial hardship.

There is not always a set repayment period

Unlike loans, which require set monthly payments, a merchant cash advance usually does not have a set timeline for repayment. How quickly the business borrower pays back the funds received depends on the volume of credit card transactions the organization processes. The overall repayment period could be anywhere from a few months to well over a year. Other times, the business seeking the advance can arrange to have the lender pull payments from a bank account. This arrangement usually involves set monthly payments, which can make repayment more predictable. However, it may not be the best option for an organization uncertain about its revenue levels in the short-term future.

Negotiating terms for a merchant cash advance can be a challenging process. Those who learn more about different financial options for companies may have an easier time selecting the best solution given their circumstances.