A business cash advance is a type of short-term loan that is provided against a future revenue stream. There are several reasons why a business cash advance can be a valuable tool when used properly. Increasing cash flow can allow a business to take advantage of opportunities that can generate more income in a short time frame.
There are three different types of business cash advance: selling outstanding accounts receivable, credit card receipts advance and short-term loan. All three methods quickly inject cash into a business and improve cash flow on a temporary basis.
Selling outstanding accounts receivable is a well-known method of improving cash flow or obtaining a cash advance. To qualify, the firm must have outstanding accounts receivable invoices that are less than 150 days overdue. The collection firm typically reviews these accounts and offers a set amount to the firm in exchange for access to collect on these invoices. This type of business cash advance is quite expensive, as the collection firm takes a large portion of the revenue. The collection firm contacts the customers and collects on the outstanding accounts receivable invoices.
A very common type of business cash advance is one based on credit card receipts. Many firms will offer a cash advance based on a portion of sales processed via credit card. This is a simple method of improving cash flow.
When a business processes a sale using a credit card, the money from the sale is not immediately available. Depending on the agreement with the credit card processing company, the funds can be transferred into the business bank account on the next business day or up to five business days later. This delay can cause problems for new businesses and small firms.
To qualify for a business cash advance, the firm must have been in business for at least one year and have a significant portion of their sales processed via credit cards. The amount of the advance is based on the level of credit card receipts for the past three to six months. The repayment terms vary, but all loans are typically due in full within one calendar year. This type of cash advance is usually an option of last resort for businesses that do not qualify for standard business loans. The finance firm takes a percentage of the credit card sales as part of the repayment plan for the entire period of the loan agreement.