Merchant Cash Advances

If you're in a cash crunch and need some working capital right now, a merchant cash advance may be an option. There are major drawbacks to using a merchant cash advance, but sometimes it's your only option.

Here's how merchant cash advances work.

==> An Overview of How It Works

Merchant cash advances specialize in giving loans to businesses that have cash flow but no collateral.

These can include retail shops whose goods can't be liquidated at auction, service businesses with no actual inventory or any number of other businesses that have no collateral or credit.

The merchant cash advance company gives the business a lump sum of cash for working capital. In exchange, the business signs an agreement that allows the merchant cash advance company to take a percentage of their credit card sales automatically every day until the loan is repaid, plus a fee.

The daily amount taken is usually between 5% and 10%, but can be as high as 20% in special cases.

==> What's the Cost of Merchant Cash Advances?

Often times the cost of merchant cash advances are huge. In fact, if you converted the amount most cash advance companies ask for into annual percentage rate (APR) terms, you're usually looking at well over 30% APR, sometimes even higher than 50% APR.

In addition, you need to look out for any additional costs, such as the legal costs of having the contract reviewed by a lawyer, signing fees, etc.

==> Should You Get a Merchant Cash Advance?

It really depends on the situation of your business, what you intend to use the money for and how much the cash advance company wants to charge you.

If you're using it to invest into projects or assets that'll earn more cash in the future, it may very well be a good investment. However, keep in mind that even if the improvements don't pay off, you'll still be liable for the debt.

Make sure you explore all other avenues of financing before you take on merchant cash advances. Talk to several banks. Perhaps even consider opening a few personal lines of credit, as those will invariably have a lower rate.

All that said, one of the main benefits of merchant cash advances is their availability. They specialize in providing money to businesses that most banks just won't fund.

Since the credit environment is quite dry right now and likely will continue to be so for quite some time, merchant cash advances may be the only option for more and more businesses.

If you find yourself seriously considering a merchant cash advance, make sure you talk to at least three companies to make sure you're getting a good deal.

To sum it up, merchant cash advances are essentially very expensive loans for businesses. However, if you have no other choice and can really put the capital to good use, then at the end of the day getting a loan may be the best decision on the table.