Merchant Cash Advance: What is it and When can Small Businesses Use It?

Merchant Cash Advance: What is it and When can Small Businesses Use It?

Businesses around the country currently have about 1 million open merchant cash advance accounts, according to data from the Consumer Financial Protection Bureau. While it’s certainly not as popular as other funding sources like credit cards, term loans, or factoring, it has helped a significant amount of businesses gain access to the capital they need to grow or cover operational costs.

As with any major financial decision, it’s important for entrepreneurs to carefully consider all of the potential pros and cons of this type of financing, which is actually more like a sale transaction and less like a loan.

For instance, many financial experts have expressed concerns in recent years about the lack of regulation in the merchant cash advance industry. Since it’s not technically a loan, it isn’t subject to the same rules that other banks and online lenders have to adhere to. So it can come at a major cost and entail some terms that are less than favorable for small businesses. However, the process also contains significantly fewer requirements and roadblocks than you’d find when trying to work with a traditional bank. So these services can provide additional options to some small businesses that aren’t able to access traditional financing.

Essentially, this type of transaction can help businesses in select situations. But it isn’t right for everyone. In order to make the best possible decision for your business, you first need to understand exactly what a merchant cash advance entails so you can determine whether or not it really fills a major financial need for your company.

When asking the question, What is a merchant cash advance? you should start by understanding what financing options are available for your business. Financing your small business is about having the right information to make a choice that suits your circumstances. The merchant cash advance is perfect for businesses that meet certain criteria. Small Business Trends spoke with Hanna Kassis from Segway Financial about who should use this financial tool and how it should go about it.

What Is a Merchant Cash Advance?

So what is a merchant cash advance exactly and how can it help your business?

“A merchant cash advance is a one time capital infusion in the form of a lump sum into a business,” Kassis says. “This is in exchange for a fixed royalty over a fixed period of time.”

Like other financing products, the merchant cash advance has a best case scenario where small business is concerned. These are best for the short term. They rely on the business’s cash flow so there’s no collateral required.

Typically, the funding amount is based on a one month average of bank deposits or credit card swipes. In other words you’ll need to have a steady and sufficient revenue history to apply for one of these. Small businesses can often get the money quickly within one to three days. Generally, the amounts are between U.S. $60,000 and U.S. $70,000. However, you need to have steady monthly revenue of $10,000 a month to qualify.

More Merchant Cash Advance Info

Here is some more merchant cash advance info you may find helpful.

Kassis also says there’s a specific set of small businesses that benefit the most from a merchant cash advance.

“You need to have a clear path to revenue if you’re going to take on this money,” he says adding that business owners need to be ready for a squeeze in their cash flow.

“All of a sudden you’re giving up 10 to 20 percent of every dollar received,” he says.

Kasis suggests there are a few boxes to check to make sure before taking one of these advances you can pay the money back. Buying inventory and flipping it works. Or, you can time a merchant cash advance to cover the slow season when you are fairly certain historically better revenues are ahead.

What Kind of Business Would a Merchant Cash Advance be Good For?

So what would be an example of a good merchant cash advance business?

“This is for new businesses and ones that haven’t been in business for 6 months as well as businesses with an owner FICO below 600,” Kassis says. A cash advance is also a good choice for shop owners without many hard assets.

It’s a good idea for industries with a high number of transactions per month like restaurants, bars and a lot of B2C companies like retail and even nail salons. One of the criteria is being able to forecast a steady flow of customers.

In any case, it’s important to get as much merchant cash advance info as you can before deciding if this funding option is right for you.

When is the Merchant Cash Advance Popular?

If you’re still not sure whether your company would be a good merchant cash advance business, consider this.

The merchant cash advance is also a good choice for businesses that can count on a cyclical revenue stream. Kassis says there’s a spike in companies looking for merchant cash advances ahead of holiday seasons.

Why is the Merchant Cash Advance a Good Choice

Let’s say you’re launching a new product line or you need some extra money to get a new client set up. The merchant cash advance is the perfect choice because you can get under $100,000 on the same day in some cases.

It’s a great financial Band-Aid if there is a broken water pipe in your restaurant that needs to be fixed quickly. Best of all, small businesses only need to fill out an application and supply four months worth of bank statements to get going.

So when asking the question, What is a merchant cash advance? start with a clear understanding of how this funding option to help your  small business survive and thrive.

Image: Segway Financial 5 Comments ▼

Rob Starr Rob Starr is a staff writer for Small Business Trends. Rob is a freelance journalist and content strategist/manager with three decades of experience in both print and online writing. He currently works in New York City as a copywriter and all across North America for a variety of editing and writing enterprises.

5 Reactions
  1. I can see how this can help you with financing. But is it more reliable than banks and other financing sources?

    • Hi Aira. These aren’t necessarily more reliable, just an alternative to traditional lending sources.

  2. Merchant cash advance is the best solution for the small business owners especially who are not qualified for the regular bank loan. thanks for a nice article. I have come to know some information through this article.

  3. Amazing article, lots of knowledge about merchant cash advance. It was very informative and easy to understand.
    Thank you for sharing with us.