Running a business is expensive, and sometimes you need a little financial help.

Whether you need money for new equipment or to bulk up your inventory, the old saying “you have to spend money to make money” applies. For businesses looking for capital, there are many options, ranging from traditional small business loans to increasingly popular merchant cash advances.

If you’re considering the latter, here’s what you need to know about eligibility, costs, and pros and cons.

What is a merchant cash advance?

A merchant cash advance is a form of funding where a credit card processor or third-party lender “advances” you money based on your credit card sales volume.

Essentially, the lending company is purchasing a portion of your future credit card sales. Instead of a traditional loan with a monthly payment, you’ll repay the advance through an automatic deduction from your daily credit card sales.

Eligibility

Merchant cash advances almost always have looser eligibility requirements than traditional business loans.

Notably, you don’t necessarily need good credit. One of the primary factors in determining whether you’ll be approved for an advance is strong credit card sales. If you can show that your business processes a lot of transactions by card, you’ll have a better chance at a successful application.

Specifics vary by lender, but in general, you may qualify if:

  • You’ve been in business for at least one year
  • You currently accept credit cards and process at least a few thousand dollars per month
  • You’re seeking at least $10,000 in funds

Some cash advance companies may have additional requirements, including a minimum threshold for credit card sales per month, but these criteria give you a starting point for understanding your likelihood of getting an advance.

Amounts and uses

Merchant cash advances are available in amounts from $5,000 to $150,000 or more. The more money you’re looking for, the more important it will be to show high volumes of credit card sales.

Cash advances can be used for almost any legitimate business purpose, including purchasing equipment or inventory, remodeling, advertising, training staff, and more.

Differences between advances and loans

Merchant cash advances are different from small business loans in a few ways, but one of the biggest is that you repay automatically through a fixed percentage of your credit card sales. Instead of sending in a loan payment once a month, you’ll have a percentage of your credit card sales deducted daily until the advance is repaid.

The good thing about a system like that is on days that you have lower credit card sales, your payment is lower as well. You won’t have to find money to meet a predetermined payment amount, which can be a relief for businesses that are a bit strapped for cash.

The bad thing is that not having a predetermined payment amount can make it difficult to budget accurately. Additionally, since you have no control over the repayment, you don’t have the ability to pay less in “interest” by making additional payments as you can with loans.

Note that cash advances don’t technically have “interest” as the profit to the lender is calculated as a fixed fee; however, for the purposes of contrasting with loans, we’re referring to it as interest. The fee cannot be reduced, unlike interest on a loan.

Loans are carefully regulated. Merchant cash advances are not loans, and therefore not subject to the same regulations. In general, cash advances may cost you more in “interest” than a traditional loan, in part because they’re seen as a greater risk to the lender.

When not to take a cash advance

Just because you may be eligible for a merchant cash advance doesn’t necessarily mean you should accept one. Borrowing money is always a calculated risk, and the caveats for loans are similar for cash advances.

You may want to consider other sources of funding if you’re already in debt, experiencing a slump in sales (particularly slumps that are out of the ordinary or that don’t follow your typical sales history), or you’re eligible for a loan with better terms and interest rates.

Even though it doesn’t have a monthly payment, cash advances are still debts, and will require a portion of your business’s income to repay. If you’re already struggling to cover your expenses, adding another debt may only make the problem worse.

On the other hand, if you’re in good financial shape but are looking to expand or grow, but can’t qualify for a traditional loan, a cash advance can be a good financial bridge. However, if you’re eligible for a small business loan, it’s usually in your best interest to go that route.

How to get a merchant cash advance

Once you’ve considered your funding options, you might decide that a cash advance is a route you want to pursue. The steps to take to get a merchant cash advance may vary depending on which company you choose. You can request cash advances through many credit card processing companies, or you can apply with a third-party lender.

Follow these four steps to apply for a merchant cash advance:

  1. Contact your credit card processor or lender.
  2. Complete a merchant cash advance application: Be prepared to provide any supporting documentation needed, such as processing statements.
  3. Carefully review the cash advance offer: Check the percentage of sales that will be withdrawn and calculate approximately how long it will take to pay off the advance.
  4. Sign documentation to accept the advance: Be sure to keep a copy of all paperwork for your records.

Some companies also provide an option to request a cash advance from your merchant dashboard or reporting panel (where you go to see information about your transactions). In some cases, you’ll only see the option if you’re eligible. Check your merchant panel, but don’t assume if there’s no option that you can’t get a cash advance from another source.

Other considerations

Some businesses treat taking a cash advance more lightly than a loan because it seems more informal.

However, it’s important to remember that cash advances are a legal obligation and that even if you go out of business, you may still be responsible for repaying the advance. Be sure to read any contracts for cash advances before signing, and consult a licensed attorney if you have questions.

View our Business Funding Guide today!
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