merchant advance

merchant advance

Any business could benefit from immediate access to money, so a merchant advance can be a legitimate business strategy. Short-term loans from traditional lenders and credit card advances can be options, but an advance against future income is a better option for some businesses.

In return for a share of future credit card receipts, the business owner gets access to cash now. The merchant advance lender gets a share of credit card receipts until the advance and a premium are paid off.

Merchant Advance Strategies:

Small business owners need to be on the lookout for opportunities. Obviously some of those opportunities can be planned for – an annual festival brings the opportunity to rent out space in that big side parking lot that customers tend to ignore – but other opportunities are unexpected. A cash advance can help provide the necessary money.

Other options might not exist. Conventional lenders won’t always extend credit for small, one-time expenses. A credit card might be usable, depending on the credit limit, the interest rate and other needs that can be expected. A merchant advance might be the best option for solving some problems or exploiting some opportunities.

Problems can be anticipated, that’s what good risk management is about. Coming up with short-term cash to handle a problem might present the same challenges that an unexpected opportunity presents. The transmission in the delivery van fails and needs to be rebuilt. Can you go without the van for a couple of weeks? If not, an advance from a short-term lender is a good way to get the money for a quick repair.

Managing Risk:

An advance should only be sought from a firm licensed to do business in that state or province. A licensed cash advance firm is likely to be reliable and professional. Credit card advances might come with a higher interest rate if the credit line is sufficient.  

Know how much money is coming in, and when. The merchant advance company would expect to see proof of future income, such as $25.000 in invoices coming due in the next 45 days. A credit card advance could easily cost $700 a month in interest on a $25000 advance, assuming that much cash is available.

Know that your credit card receipts or other income can cover the advance in a reasonable amount of time. While a merchant advance is not a loan, the premium for a cash advance can reach 200% per year. Unlike payday loan stores and other lenders, merchant advances may not be subject to limits on what they can charge. Be clear on what the money will really cost.

Use Merchant Advances with Care:

Small business owners have many options for dealing with short-term needs for cash that sometimes come up with all businesses. A merchant advance, if used responsibly, is a useful tool for businesses looking to exploit unexpected opportunities or meet short-term needs.