Merchant cash advances: pros and cons for working capital

Sales-based businesses may consider a merchant cash advance when an infusion of working capital is needed. You’ll receive a lump sum upfront in exchange for an agreed-upon share of future sales that come from debit or credit cards. This kind of short-term financing typically lasts between 6 and 12 months. Is it right for you? Let’s learn more about the pros and cons.

Pros of a Merchant Cash Advance

Like many working capital loans, a merchant cash advance is a form of unsecured financing. That means your assets aren’t at risk in the event you’re unable to repay the advance. This keeps both your savings and your equipment safe from being repossessed by your lender.

Unlike a loan, however, repayment of your merchant cash advance isn’t fixed. Instead, it’s tied to your sales. In the event you have a slow month and your revenue is down, you won’t be overburdened by high fixed payments.

There also are no late charges because repayment is redirected from your credit and debit card sales. This happens automatically, so it removes the burden from you having to schedule payments every week or month. Additionally, merchant cash advances are usually available to small business owners who may be credit-challenged.

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Cons of a Merchant Cash Advance

The major negative point associated with a merchant cash advance is that the fee may be a lot higher as an APR compared to a traditional working capital loan. Plus, you generally have to stay with the same card processing company through the repayment period. If for whatever reason you want to implement a new card service, you’ll have to wait until your advance is paid in full. And if you’re looking for ways to get around repayment through your card sales, think again. You’re not allowed to encourage your customers to pay in cash to avoid repaying the merchant cash advance.

The Bottom Line

A merchant cash advance can be an effective tool for working capital if you don’t have access to other financing options. However, it’s always smart to compare your options to make sure you pick the best one for your small business.