Many business owners hear the term business cash advance but have no idea what it is or how it differs from a business loan offered by banks. A business cash advance also known as a merchant cash advance is a financial loan alternative to traditional business loans offered for individuals who have bad credit or just don’t meet the approval requirements from banks. This article offers a detailed overview of what a business cash advance and the main advantages to this type of borrowing versus a traditional business loan.
A business cash advance is a funding solution where a lender gives money to a company to purchase a small percentage of future credit card sales made by the borrowing company at a discount. A clear example would be say a borrower receives 20,000 dollars in funding. The lender will establish a time table to pay back the principal amount plus the one-time charge for lending the money, in this case we will say 4,000 dollars. For every credit card sale made by the borrowing company, for the sake of the example we will say each sale being 100 dollars, 20 dollars or 20 percent will be automatically deducted from each sale until the 24,000 is paid back. At that point the borrowing company will once again receive 100 percent of their credit card sales and have the option to apply for funding once again.
The basic fundamentals to the repayment process is critical to understanding the additional benefits of a business cash advance. The main advantage when paying back a business cash advance is that because a percentage is deducted and not a fixed payment as would be the case with a traditional business loan, lenders do not charge interest on the money. This means that in the example above the borrower would know exactly what he or she would have to pay back, 24,000 dollars and that amount would never change.
Another benefit as a result of the repayment structure is that because there is a percentage set and not a fixed payment the amount each owner pays back on a monthly basis would decrease during a slow business cycle. This is also a plus for the borrower because if the projected payback period is 1 year, if a slow period falls upon the business then the time to pay back the business cash advance is extended with no additional costs. This even would effectively reduce the overall cost of the loan to the business.
What has made a business or merchant cash advance so popular today is that almost any business owner is eligible for funding. Business cash advance companies primary concern is the monthly credit card sales and not the credit history of the applicant. The payments are automatically deducted electronically, which in itself is an advantage for those people who can’t manage check writing and the whole bill payment process, but this further reduces the risk of lending the money because it is the actual business paying back the money and not the individual that may or may not have bad credit. This has contributed to extremely high approval rates for business cash advance applications.
The major disadvantage, and perhaps the only one to this type of borrowing is the premium charged for the principal loan. In the example above there is a 40 percent charge when in comparison a bank might charge 6 to 12 percent for a similar business loan. But if one considers the time it takes to get a bank loan, which may range from a few weeks to a few months in comparison to the few days it can take for a business cash advance, the gained profits or financial opportunity from immediate financing may actually reduce the actual costs for the advance.
Whether or not a business cash advance is a good financial solution for a company likely depends on the availability of other business loan options as well as the opportunity and profit that can be gained from having the additional funds. This article offers insight into this funding option in an effort to help business owners make an educated decision when seeking business financing. If you are interested in applying for a business financing you can follow the link for further information about Shield Funding’s business cash advance option.