What are the challenges of a merchant cash advance?

Thinking about getting a merchant cash advance? You may want to acquaint yourself with all the challenges you may face as a small business owner looking for a financing option. Keep reading to find out about all the things you may be struggling with, as well as some of the benefits you may enjoy by applying for a merchant cash advance to help your business out with an injection of cash. 

business man jumping over challenge fencesWhat are the challenges of a merchant cash advance?

When applying for a merchant cash advance online, there are a few key items you need to be aware of. We have covered a number of them below, but you can also find a great guide by merchant cash express that covers key areas in more detail.

  1. The amount of money you can borrow is dictated by your projected income

One of the issues you may encounter is the fact that you may not be able to borrow the amount you had in mind, to begin with. You see, the sum of money you can get is decided based on the income you made in the past and your projected income for the next period. That is to ensure affordability. That can be a plus; however, it also means it can limit you and you may end up with less money than you had originally hoped for.

  1. The lender has 24/7 access to your accounts

Because of the way the repayment method is set up, you need to grant the lender access to your accounts. Instead of making fixed, regular repayments to the lender, like you would normally with a personal loan, the lender retains a fixed percentage of the day’s income from credit cards. This amount is automatically taken out of your account, so the lender needs access on a daily basis. If you are uncomfortable with that arrangement, for any reason, this may just be a deal breaker for you.

  1. You need to present your credit card transaction history dating back at least 12 months

Something that may be a problem for some businesses is the fact that upon application, you need to present your transaction history for credit cards and debit cards. If your business has not been operating with them for so long, that will render you unable to be approved for this financing option.

  1. You need to make a minimum amount from credit card transactions

Another requirement related to credit card and debit card transactions is the minimum income necessary to be approved. Because of the way the repayment process is set up, the lender takes their repayment exclusively from the money you make from these types of transactions. But in order to be able to repay based on this income, the lender must first verify that you actually make enough money to be able to afford it. That is why they look into your transaction history and make a projection for your future income based on it. If you do not make that minimum amount, you cannot afford to repay.

  1. You may be required to switch to a different card processor

Something that is often overlooked is the fact that in order to commit to a merchant cash advance contract, you may be required to switch card processors. Now, this may not be the biggest issue you will face, but it can be a faff and something you need to keep in mind, but that many business owners don’t realize when they apply for a business cash advance.

What about benefits?

Of course, it’s not all bad, and merchant cash advances have advantages, just like they have disadvantages. Let’s take a look at what benefits this financing option can bring to your business.

  • You don’t have to provide collateral

The first thing is that you do not need to provide an asset to put up as collateral to secure the money you are borrowing. That can make a massive difference if you’re searching for a loan with no assets available. This is possible thanks to the fact that the money is secured through the repayment method and the way the arrangement is set up.

First of all, affordability is not really questioned because it’s ensured by the lender. They take a look at your past income and your projected income and set the amount you are allowed to borrow.

Also, the fact that the repayments are made automatically means the lender has access to your accounts, granting them more control and rendering it unnecessary to further secure the loan.

  • The repayments are flexible

As for the payments themselves, they are not fixed, but flexible. You pay a fixed percentage of a fluctuating daily income, meaning that you will never be required to pay more than you can afford. Good sale days result in bigger repayments, while poor sale days mean you pay less. That can go a long way to ensure you do not run into trouble repaying.

All in all, business cash advances can be a good financing option that brings many advantages, but there are also disadvantages and challenges to take into consideration. If you cannot meet the requirements, perhaps you might consider a more traditional loan option for your needs. You can use a loan calculator if affordability is a concern, or contact a financial help institution for advice on handling debt and loans.