A major goal of any business is to grow and expand with time. But for a business to achieve this, it needs a steady supply of cash to carry out its various business objectives. It is a common experience for most business to be unable to generate the funds they need from within the businesses. There are also times when a business is faced with unexpected challenges. At such times it is important for a business to have ready access to business finance. Whether the money is needed for meeting up with payroll, purchasing a new piece of equipment, or even settling an outstanding debt, it is often desired that it is quickly available.

Business cash advance loans from merchant cash advance providers are practically the only means through which a business can get funding quickly in the present time. Everyone in business is probably already quite familiar with the several problems with commercial bank loans that make them not ideal for situations where a business is in dire need of cash. There is so much delay in bank loans, so much so that businesses have to wait for several weeks before obtaining feedback on their application. And, the feedback in most of the cases is usually negative. However, firms opting for business cash advance loans stand to avoid all of the hassle associated with loans from traditional financial institutions. This is probably why merchant cash advance has become much more popular than other sources of alternative finance.

Read More: Utilizing Merchant Cash Capital for Business Growth

What really is merchant cash advance?

First and foremost, it must be said that a merchant cash advance is not a loan in the traditional sense of the word. This is because a loan transaction is one in which an amount of money is issued to a borrower by a lender, money which the borrower is expected to, and has agreed to pay back in addition to whatever interest the lender charges, at some specific time in the future which is known to both parties. But, business cash advance loans are commercial transactions between two businesses, where the borrowing business referred to as a merchant, agrees to sell its future receivables to the merchant cash advance provider in exchange for a lump sum of cash. Because a merchant cash advance is not a loan, it is not regulated by the government. The fact that the merchant cash advance industry is unregulated has helped individual providers to have seamless operations without being bogged down with undue government regulations. Unlike a commercial bank loan, merchants do not guarantee to pay back business cash advance loans unconditionally. The payment of a merchant loan is tied to the credit card sales of the business, meaning that if for whatever reason, a business crumbles, and is unable to meet up with payments, it is the merchant cash advance providers that stand to lose. There is nothing in a god merchant cash advance transaction that suggests that the business owner promises to personally repay the loan. Granted, some dubious merchant cash advance providers have tried to extract personal guarantees from business owners at some point. However, such attempts were largely unsuccessful as court rulings in cases where the merchant vendors tried to make claims showed that there is no circumstance under which business cash advance loans can be treated as loans. It was emphasized that a merchant advance was a sale and as such a lender could not have guarantees of any sort. Having said that, let us consider what a merchant cash advance transaction entails.

How does a merchant cash advance work?

Business cash advance loans can only be issued after a merchant cash advance agreement has been signed. The merchant cash advance agreement is legally binding on both parties and contains the terms of the contract. Terms of a merchant cash advance transactions usually include factor rate, total payback amount as well as the retrieval rate. Because the sale of the future credit card sales is doe at a discounted price, the merchant is made to pay higher than what it borrowed through a special process of factoring. The factor rate does not usually exceed 1.5 and depends on the amount that is borrowed, monthly revenue and other factors which are peculiar to the business in question. Since business cash advance loans are recouped from the credit card sales of the business, it is important for both parties to agree on the percentage of the daily credit sales that will go into the repayment of the debt.

Before this amount is determined, the merchant cash advance provider typically examines the sales revenue and expenditure of the business to determine how much it can commit to paying the advance without seriously hampering cash flow. It is either a fixed percentage or amount is decided on. In most cases, businesses prefer a fixed percentage since it has the advantage of making the business pay according to business conditions: more is paid when sales are high; less is paid when sales are low. Obviously, business cash advance loans are quite easy to process, and what the merchant cash advance agreement has been signed, it takes a few days before cash is made available to the business. Thereafter, the merchant continues to make daily payments until the advance has been repaid.

Read More: The Difference Between Loans, Cash Advances, and Factoring

 Should a business consider a cash advance ahead of a conventional loan?

Depending on the situation a business finds itself, a merchant cash advance might be the best option it has. If for instance, a business has been unable to obtain a loan as result of bad credit score, inability to provide collateral, it can rest assured that business cash advance loans are the best option since good credit scores and collateral are not required. Moreover, if a business is in dire need of cash, it should know better than to apply to commercial bank loan for loans since it would have to wait for at least a few weeks. Above all, if a business is seeking a source of funding that is highly reliable, then it should look no further that merchant cash advance as approval rates are extremely high. This is exactly what several small business owners have been doing for some years now. They have found that business cash advance loans are the easiest and surest means of obtaining business funding.