What are the benefits of a merchant cash advance? How does it improve your cash flow? How does it save you money? When you are a small business owner or an entrepreneur, are there advantages or disadvantages to using a merchant cash advance? There are many.
1. A merchant cash advance allows a business owner to access the cash value of their existing credit sales or other receivable streams on an expedited timeline. Using these cash flows, the individual approaches a lending provider who then advances the funds to the business immediately. This can provide a welcome boost in the monthly cash flow that an individual has available to them. However, there is always a risk when a small business enters into a loan agreement. The borrower must make the commitment to repay the loan on the agreed term and in full. If the need to repay the loan arises later in the future, then the lender will require further documentation from the business owner and additional time before providing funding.
2. A merchant cash advance can provide the business owner with additional time to manage their cash flow. Typically, when a merchant advances funds to their company, they are required to pay the capital amount in full at the time that the funds are received. If they have a significant increase in sales but a reduction in purchases, they will incur interest and pay penalties on the difference between the two figures. This may negate the positive effects of the increased sales and create a situation in which the company is operating under cash flow stress. On the other hand, if they receive the funds early, they can fulfill their obligations and avoid the penalty charges and interest.
3. Another benefit is that a merchant cash advance offers a solution for short-term financing needs. Often times, businesses generate significant growth in the first few months of operations but experience declines in sales during the rest of the year. Because the company does not have the capacity to generate the same amount of sales again immediately, they may require some form of temporary funding to avoid running short of cash during the holiday season. When they contact a merchant cash advance provider, the provider will provide them with a loan that is based on their monthly sales revenue level and will be paid back over the course of the agreed term.
4. Merchant cash advances allow for a significant amount of flexibility. In many cases, a provider will only require a one-time application fee to get the business cash advance started and will then allow the client to repay the loan at any time over the course of the agreed term. This gives the client significant value because it enables them to avoid interest charges on interest that may build up while they are in the rollback phase. The provider can also provide their client with an unlimited amount of potential repayment options. While the short-term funding requirement is often seen as a disadvantage, the lack of long-term commitments makes the MCA a unique solution for a large number of businesses.
5. A flexible solution for cash-flow problems. When a small business encounters a temporary drop in sales due to circumstances beyond their control, they can quickly apply for an MCA. The application process is simple and usually does not take more than a few minutes. Once approved, the Canadian business cash advance company will provide a temporary holdback amount in order to protect the account. The holdback amount is reduced each month until the account is fully repaid and the MCA is paid off.
6. Another major benefit of applying for an MCA is the factoring rate. A factoring rate is a percentage of a merchant’s loan amount that must be paid back to the lending party. MCA cash flow is often based on the interest rate, so if a company requires a higher interest rate than the average rate, they may be able to receive lower payments by applying for an MCA. In addition, a factoring rate can be beneficial in that the company may be eligible for additional funding should their current cash flow problems not be easily remedied. The factoring rate is typically tied to a prime rate and may only increase over time. When companies regularly pay on time, they can benefit from the factoring rate.
While many small businesses are not familiar with the MCA and do not fully understand the benefits of a merchant cash advance, once they understand how it works, they begin to see the benefit of using this option over alternative short-term financing solutions. When a company needs extra money to pay their bills but knows they are going to run into problems that make traditional short-term financing unavailable, 2m7 Financial Solutions may be the best solution. In addition, when a factoring provider chooses to hold the merchant cash advance, the merchant does not need to provide collateral to secure the loan. When a business has extra money that needs to be invested and does not have access to traditional financing sources, a MCA may be the answer to providing the funds that they need.
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