Cash flow is what businesses rely on the most to stay afloat. According to the SBA, roughly 50% of small businesses fail within the first five years. Businesses fail for many reasons including bad market opportunities, poor management, lack of competitive advantage, competition with larger players, and cash flow. Commonly, entrepreneurs underestimate the capital needed to get up and running properly and then maintain the business to breakeven. Right now, loan default rates are higher than they’ve been in quite a while so what should you do if you need a temporary cash flow fix and a loan is not an option?
One alternative to traditional financing is business cash advance. It’s similar to a loan in that you apply, agree on percentage rates and the amount of advance, and then start repaying. Advances are much easier to qualify for than traditional loans, but come with a much higher percentage rate. But if you don’t want to spend the hours and hours negotiating with banks and investors when your business needs cash, it is one of the better options.
With a business cash advance, you pay back the advance with your credit card sales so in order to receive this type of funding, you’ll need to first accept credit cards. If your company does only a small amount in credit card sales, you might want to consider another route. If you do a decent volume in credit card processing sales and you get approved by a provider, providers will take a percentage of daily sales until the advance is paid off in full. It can get ugly if you sign up with a provider and can’t repay the advance as scheduled so make sure you have the volume in credit card sales first.
The agreement you sign with a provider will general have percentage rates, monthly minimum amounts, penalty fees, and length. If a provider requires full, or balloon, repayment don’t enter an agreement. If you notice in the agreement flexible retrieval rates, this means the provider can take more out of your credit card sales than is safe and you should look elsewhere. Pledging collateral or giving a provider access to your bank accounts is also a no-no. You’ll need to make sure your merchant account provider can work with the advance company and all software is compatible.
To check a company before you use them, The North American Merchant Advance Association is a self-regulated organization of providers and also can educate you further about industry standards and practices. In addition to this site, it never hurts to ask for references.
Merchant cash advance can be a great option for your business if you need cash flow quick. Just remember to work with a qualified provider to make sure the financing you receive won’t add up to more fees than you can pay for leaving you in the 50% category of businesses that fail.