A merchant cash advance is not a loan, and that can be a good thing.

In fact, many business owners choose to take out a merchant cash advance precisely because a regular loan wont work for them. The monthly payment schedules for a regular loan, for example, often do not fit with certain business models, such as restaurants.

But even as merchant cash advances differ from loans, the two business funding options also share important similarities. Understanding these common characteristics is a vital part of making an informed decision about what business funding works in any given situation.

Merchant Cash Advance: The Credit Issue
Customarily, merchant cash advance providers make decisions based more upon the credit card sales of a business than the credit score of the business owner. Again, thats a major selling point for merchant cash advance providers.

Business owners are risk-takers, and rarely have perfect credit scores.

However, credit score is not irrelevant to the merchant cash advance approval process. Rather, its a balance between credit card sales and credit score. The higher one or the other is, the more likely it is that a merchant cash advance will be approved. Of course its always preferable to have both high receipts and good credit.

Credit score can also affect the amount of merchant cash advances offered. The vast majority of merchant cash advance companies will check credit scores before funding a business. Credit score comes into play as well in the event of non-repayment of the cash advance. The business owners credit score will take a big hit if a merchant cash advance goes unpaid.

Long-Term or Short-Term?
Any company that has money and lets another business use that money will demand payment for doing so. In the case of a small business loan, the payment comes in the form of interest. With a merchant cash advance, the payment comes in the form of a fee. Fees for merchant cash advances are similar in nature to the interest charged on a business loan in the sense that the longer the money is used for, the more the use of the money costs.

A merchant cash advance for three to six months, for instance, will bear a lower overall cost than a merchant cash advance of 12 to 18 months. The longer it takes to pay back the advance, the more the overall repayment amounts to. When making the decision to take out a merchant cash advance, then, dont just look at the percentage of credit card sales due to the merchant cash advance provider. Evaluate, too, the total amount repaid, and pay back the advance sooner to pay back less.

Approval Goes Both Ways
The merchant cash advance industry is attempting to regulate itself so that honest and reputable companies thrive and rip-off artists are driven out of business. As with any industry (look at the behavior of big name banks over the past decade), this is an ongoing process.

In the meantime, merchants need to be aware that they dont just need approval from the merchant cash advance provider. They need to approve the merchant cash advance provider. It takes two to create win-win business funding.

Source
Yahoo Small Business