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Article · Aug 9, 2017

Should you get a merchant cash advance? Learn the pros and cons

Color illustration of piggy bank receiving cash.

When you’re in charge of a business, there are inevitably going to be moments where you need access to more funds than you actually have on hand.

While term loans can be great options with long repayment periods and low interest rates, it sometimes takes several days—if not weeks—before an application is approved. That thing your business needs money for? It’ll probably have to wait.

If you’re planning to make big business changes over time, have a solid footing in business and a healthy credit score, a term loan is most likely your best option when it comes to debt financing. But if you need quick access to working capital, you may be considering a merchant cash advance. But before you take one on, be sure to consider the pros and cons.

What is a merchant cash advance?
Simply put, a merchant cash advance is a lump sum of money that you, the borrower, receive at a fast turnaround. You then repay the advance through a percentage of your credit card sales on a daily basis.

Merchant cash advances make the most sense as a financing option for short-notice issues, such as making payroll or rent. However, they can be used for a number of business expenses, like financing a piece of equipment, purchasing inventory or expanding your business.

Pro: Quick access to financing
Again, a merchant cash advance is a great option if you’re temporarily short on funds and need to cover a cost quickly. Unlike many traditional bank loans that may take days or weeks to process, most merchant cash advances involve an online application; you could potentially see the advance hit your business account within a few days.

Con: Less flexibility to change providers
Since you repay your merchant cash advance based on your daily credit card sales, you’ll end up paying less when sales are down and more when they are up. This can be a good thing, because unlike other loans with a set repayment schedule, you won’t owe more than you’ve earned in a certain period of time.

However, it can be easy to get roped into an undesirable borrowing situation if you need cash quickly. And unlike other types of funding, refinancing a merchant cash advance can be tricky (if not impossible), since your repayment is tied up entirely in your future credit card sales.

So, before you get stuck repaying a very high interest rate on your lump sum, be sure to ask plenty of questions and do your research. 

Pro: Lenient application criteria
Another difference between merchant cash advances and traditional bank loans is that there is a wider range of accepted applicants. Traditional lenders typically only approve business owners for funding when they have good revenue, several years in business and a good credit score.

For struggling business owners, this presents a problem. They say you need to spend money to make money, but if you can’t get approved for a traditional loan, how are you supposed to make that happen?

Merchant cash advances are a viable option for business owners who don’t have good credit scores, or who haven’t had enough time in business to build a solid history of creditworthiness and profitability. Since merchant cash advances are paid back through a percentage of your future sales, credit score is not nearly as important a factor as it is for other types of lenders.

Con: Higher interest rates and added fees
Of course, there are caveats that come with granting funding to a wider pool of business owners. One of these is the higher interest rates and fees that come with a merchant cash advance. In fact, these are the most expensive financing product on the market.

Because this is an unregulated industry, you may not know what your interest rate will be unless you ask for it upfront. Before accepting a merchant cash advance, read the fine print—know what you’re getting into and exactly how much you’ll be expected to pay in the long run.

There also may be hidden fees that you wouldn’t necessarily find with other business lenders. Definitely check with your provider first, so that you can make an informed decision that will benefit the future of your business.

Pro: No collateral required
Again, you’ll find out whether you have been approved for a merchant cash advance quickly—and unlike other types of funding, you won’t have to put up collateral against the amount you borrow. This is because merchant cash advance providers look to your current sales to get an idea of whether you’ll be able to pay back the lump sum, and not necessarily your credit history.

If you have a healthy history of past credit card sales, but don’t have a good credit score, a merchant cash advance may be a good option for you.

Con: Disruption of cash flow
When it comes to repayment, an amount will be deducted from your daily credit card sales until you have paid back your agreed-upon sum (plus fees). This can be a good thing, because it means that you won’t be responsible to pay the same amount each day—what’s deducted will be proportionate to that day’s earnings.

However, this inevitably reduces your cash flow on a day-to-day basis. Before you agree to accept a merchant cash advance, be sure that your business will be able to handle this disruption. Will you still be able to cover all your other expenses? If not, perhaps it’s time to explore your other options.

One last note: As mentioned, merchant cash advances are not regulated industry. This means that some lenders will have good experience and solid client testimonials, and others won’t. To make sure you’re getting in the best possible situation for your business, be sure to research these companies online and check into their history with the Better Business Bureau.

Being in control of a business is hard, and finding the right financing can be quite a chore. The fact that you’re researching your options in the first place is a good start. We need to say it one more time: Merchant cash advances are expensive. You should always see if you qualify for something else first (if you have time to do so).

Keep researching; you’re sure to find the best option for you and your business.


Meredith Wood

Editor-in-Chief at Fundera

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business financial solutions. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.

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