In the past, getting a merchant cash advance was often considered to be an unwise business decision. It was assumed that to utilize this type of financing, a business had to be on the brink of disaster and that receiving a merchant cash advance was the final step into financial ruin.
Even now, with alternative finance moving out of the shadows and closer to the forefront of the business financing industry, many are still leary when it comes to the merchant cash advance. This is unfortunate, as it can often be a great option for obtaining short-term capital, allowing business owners to seize opportunity and cultivate growth.
If this sounds like your current business situation, don’t be too fast to dismiss the benefits of a merchant cash advance. It’s important to take the time to learn what it is and how it works. As with any business agreement, make sure you completely understand all the terms and conditions before sign on the dotted line.
Is a Merchant Cash Advance a Loan?
The simple answer to this question is no. A merchant cash advance is a sales agreement. As opposed to borrowing money, the merchant agrees to sell a percentage of future credit card revenue to the financing company. Instead of charging interest, a one-time “factor rate” is applied to the advance. This is normally higher than the interest rate on a traditional bank loan. The reason is this type of financing is unsecured and approval is not based strictly on creditworthiness. This potentially leaves advance providers facing at greater risk. However, just because the factor rate is higher than traditional interest rates doesn’t necessarily mean that taking a merchant cash advance is an unwise business decision. It depends on your specific business needs and situation.
Are Merchant Cash Advances Regulated?
Many would have you believe that the industry is completely unregulated. This has been the source of much of the controversy surrounding merchant cash advances and other the alternative finance options. The fact is the industry is regulated by the Uniform Commercial Code in each state. In 2017, the U.S. District Court for the Southern District of New York official ruled that merchant cash is not a loan, therefore It is not regulated by usury law which regulates the loan industry.
Factor rates will vary from provider to provider for a couple of reasons. The first is the strength of your business revenue and business history which speaks to your ability to repay the advance. The other reason factor rates vary is because merchant cash advance providers are subject to different regulations than traditional loans and allow them to set their own factoring rates.
With alternative finance moving closer to the mainstream finance industry each year, most merchant cash advance providers charge fair and competitive rates. Just as you would when choosing a lender, you want to shop around and compare advance providers and the rates they offer before making a decision.
Is a Merchant Cash Advance Too Expensive?
That depends on how you look at it. As previously mentioned, factor rates are typically higher than the interest charged for a bank loan. However, what you need to ask yourself is “Are the benefits of a cash advance and the return it can help your business generate worth the expense?”
If waiting out the long process of applying for a bank loan or being denied due to less-than-perfect credit could cause you to miss out on an opportunity to take your business to the next level, the added expense is probably worth it. In most cases, there is a better chance of being approved for an advance and you can receive the funds within days of being approved. As long as your business financials are in good shape and your revenue is consistent, gaining access to additional working capital through a merchant cash advance can be a solid business decision.
The best way to decide is to schedule a consultation with various providers and explain how you intend to use the advance. They can assist you in making an informed decision. After all, your success is their goal as well.
At CFG Merchant Solutions, we can help your business moving forward with merchant cash or one of our other small business funding options. We will guide you in choosing the perfect solution for your individual business needs. Our team brings to the table more than 60 years of institutional investment banking experience in the credit, commercial finance, and capital markets.
We are a privately owned and operated specialty finance and alternative funding platform. We focus on providing capital access to small and mid-sized businesses (Merchants) in the U.S. that have historically been underserved by traditional financial institutions and may have experienced challenges obtaining timely financing. Contact us or apply online today!