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What is a Merchant Cash Advance?

By April S. Kenyon
Updated May 17, 2024
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A merchant cash advance is an alternative to a traditional business loan taken out at a bank or other financial institution. This type of loan is based upon credit card factoring. The lender agrees to provide the merchant with a lump sum of money in exchange for a percentage of daily credit and debit card sales. Automatic deductions are then taken from the merchant’s account until the repayment amount has been met. These percentages are predetermined at the time of approval and often include high interest rates and fees.

Many financial institutions place strict requirements upon business loans. Small or new businesses may have a difficult time securing a business loan at a bank and opt instead to apply for a merchant cash advance. Financial lenders who provide merchant cash advances do not require the business to have a credit card history and do not check credit scores. Many new business owners who have not had time to build up a credit history or establish a credit score might apply for a merchant cash advance for start-up costs. Small businesses might also choose this type of cash advance to promote growth or even to help support a business if sales have been down.

The approval rate of this type of cash advance is high since businesses are not required to have an established credit history or a good credit score. Business owners applying for a merchant cash advance loan are required to provide proof that the business accepts credit and debit card sales as well as a report of those sales. A merchant cash advance is generally much easier to qualify for than a standard business loan. Turnaround times also tend to be much faster since very little paperwork is involved. Unlike business loans, which generally place strict restrictions upon what the loan amount can be used for, business owners are free to use a merchant cash advance as they see fit.

Fees and merchant cash advance rates are generally much higher than most standard loans since these advances are considered to be a high risk. No collateral is needed since repayment is based upon future sales. The transaction is recorded as a sale rather than a loan, so the credit rating of the business is not affected in any way. Business owners applying for a merchant cash advance should carefully read over the terms and conditions of the agreement before finalizing the transaction.

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