How a cash advance works

Cash flow is an issue for most small businesses. And when cash flow struggles, it often means that cash reserves do as well. This situation can be concerning because without money on hand, entrepreneurs can struggle to get through business slowdowns, survive equipment failures, or take advantage of new growth opportunities.

Given the challenges associated with the tight profit margins of most small businesses, it’s important to know how a cash advance works. It’s a popular form of financing that can connect you with as much as $200,000 in just 24 hours. In some scenarios, that speed can be the difference between disaster and survival.

Because the money is so efficient to obtain, there’s a premium cost associated with it. Be advised that the interest rates start around 18%. Given the steep rates, you should only consider a cash advance when you’re in a situation that absolutely requires fast money. Examples could include replacing a crucial piece of equipment that has broken down or capitalizing on a lucrative business opportunity that presents itself.

However you intend to use the money, it’s important to note that merchant cash advances don’t have strict usage rules like you might find with other types of financing. Nearly anything relating to your business is acceptable with a cash advance, so that versatility makes it a great option regardless of your business type or industry.

Merchant cash advances working by tapping into the future earnings of your small business. When you receive the agreed-upon amount of money from the lender, the repayment period begins. Each day, a percentage of your credit card deposits will be set aside for the lender. This arrangement is unique and because the process is technically a sales transaction, it won’t appear on your credit report.

Speaking of credit reports, yours probably won’t be scrutinized when you apply for a merchant cash advance. This scenario is rare because lenders typically use personal and business credit reports as an important way to gauge whether or not they can trust you with their money. But because a cash advance is repaid directly through your daily transactions, the performance of your business is what really matters.

You’ll first experience this difference when you begin the application process, as you won’t need to provide nearly as much documentation to the lender as you would with other kinds of small business loans. Most likely, the lender will just request your bank statements from the last 6 months. As long as you’re doing more than $2,500 a month in credit card transactions, you should be in great shape.

Now that you know how a cash advance works, you’re better able to determine whether it’s a smart financing strategy for your small business. The key benefits are fast and convenient access to cash. On the flip side, you pay for that convenience with interest rates starting at 18%.

If you’d like help deciding whether or not a merchant cash advance is the right financial solution for your small business, feel free to reach out to our funding experts.