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What is a Business Cash Advance?
-By Kay Maxwell
A business or merchant cash advance provides upfront cash in return for a percentage of your future receivables. Editors Note: This is the first in a three-part series on merchant cash advances (MCAs). In this piece we explain the basics of MCAs, and in the following two pieces, we explore the differences between MCAs and bank loans and answer frequently asked questions.
In todays tight credit market, a growing number of small businesses are turning to merchant cash advances for access to capital.
Merchant Cash Advance: How it Works
A merchant cash advance provides a business with a lump sum in exchange for future credit and debit card receivables. Unlike a business loan, a merchant cash advance requires no personal guarantee or collateral, and comes with no fixed payment schedule. As a business owner, you agree to sell your future receivables to a provider at a discount.
Say you own a clothing boutique and need $50,000 to buy inventory. To get that money now, you might agree to sell $62,500 worth of future credit card sales. Each time you make a credit card sale, a percentage of the revenue is forwarded to the merchant cash advance provider until the entire $62,500 is paid. Usually arrangements are structured so cash advances are paid off in less than a year.
Typically merchants use business cash advances to buy new equipment, inventory or seasonal merchandise, expand or remodel their businesses, or pay off debt or taxes, but there is no restriction on use.
You must be able to show a track record of credit card or debit card sales to get a merchant cash advance. Approval rates are high, although open bankruptcies or overdue rent payments to your landlord could disqualify you.
Business Cash Advance Advantages
The financing alternative offers several advantages, including:
Business Cash Advance: Is it Right for You?
The merchant cash advance industry has grown quickly in the last decade. The North American Merchant Advance Association released best practice guidelines for the industry in April 2010 to ensure the product is sold and implemented properly.
Research merchant cash advance providers before doing business with one, and make sure you understand the financing arrangement, costs and contract terms.
Our next article in this series compares merchant cash advances to conventional bank loans.
Kay Maxwell is a writer who specializes in small-business and personal finance topics.