Credit Card Processing Blog

Top Questions to Ask When Getting a Merchant Cash Advance

October, 10 2016 9:00 AM / by Reliance Star

Obtaining outside funding for your business is an important decision that you will likely have to make at some point as an entrepreneur. Before entering into a merchant cash advance agreement, it is important that you understand exactly what you are getting yourself into. Be sure to ask plenty of questions to ensure that you have all the details you need to make an educated decision.

How Is a Merchant Cash Advance Different from a Small Business Loan?

While both of these types of financing involve borrowing money for your business, there are some key distinctions that you need to be aware of. First of all, with a loan, you’ll have fixed payments for a specified period of time. On the contrary, merchant cash advances are borrowed against your expected credit card payments, so your repayments will be a percentage of your daily credit card receipts until the advance is paid back. This can be a great option for retail businesses that are seasonal and are expecting to have a lot of credit card charges in the near future. If your business is doing well, you’ll pay back the advance quickly, whereas your payments will be much lower if sales are slow, giving your business greater flexibility in repaying the advance.

How Much Should My Business Borrow?

This is a question that you’ll have to spend a fair bit of time considering. While it may be tempting to borrow as much as a lender is willing to give you, keep in mind that a higher balance means higher interest. A smaller amount will end up costing your business less in interest charges in the long run, so it is often better to borrow only what you need, not necessarily every dollar made available to your business.

What Are the Terms of Financing?

Each lender will likely offer different financing terms, so it is important to understand the details before entering into a financing agreement. Take the time to shop around with different lenders to find the terms that are most favorable for your business. Interest rates and repayment percentages vary widely, so make sure that you know what you are getting your business into before signing on the dotted line. Be sure to find out about any penalties as well to ensure that you are not getting sucked into a predatory arrangement.

Should I Use a Traditional or Online Lender?

With today’s modern technology, often banks and lenders offer their services online. In many cases, online lenders can offer lower interest rates than traditional brick-and-mortar organizations, due to their lower overhead costs. However, you may find it slightly more difficult to obtain customer service when needed, as there are no physical locations where you can talk to someone in person. Regardless of which type of lending institution you choose, always do plenty of research in advance to ensure that you are working with a reputable organization. 

What Can I Use the Funds For?

As with a traditional small business loan, you can use the funding from a merchant cash advance for just about anything you want as long as it is related to your business. This could include purchasing additional inventory in advance of the holiday season, setting up a merchant account, renovating your office, or purchasing new manufacturing equipment, to name just a few. However, it is not a good idea to borrow money to try to keep a floundering business afloat. If you are struggling as an entrepreneur, it is increasingly unlikely that you will be able to make repayments, which could put you at risk of bankruptcy. Depending on the way your organization is structured, you may even have to use your personal money to make repayments.