What is a Business Cash Advance?

what is a business cash advance

Running a small business is not easy. Managing employees, working with customers and vendors, overseeing marketing efforts, and dealing with taxes and legal/regulatory issues can be difficult, not to mention time-consuming. So, the last thing you want is an unexpected cash shortfall. But, on the other hand, not having enough working capital can present your business with big problems.

You risk failure if you cannot afford to pay your staff and your suppliers or stock up on much-needed inventory and supplies. Several funding options are available to address short-term cash windfalls, one of which is a business cash advance. Small business owners ask a common question: What is a business cash advance? This Balboa Capital blog article is for you if you are unsure. It explains the ins and outs of business cash advances, including how they work and what they can be used for.

A lump sum of cash.

A business cash advance, also referred to as a merchant cash advance, is not a loan for business. Instead, it is a financing solution designed to address small businesses’ short-term cash flow needs with high monthly transactions. These include restaurants, coffee shops, small retail stores, and hair salons, which usually have a steady flow of customers who pay with credit cards and debit cards.

The advance is provided as a lump sum of cash that will be paid back with a percentage of future credit card and debit card sales. Every lender is different, but business cash advances typically range from $5,000 to $250,000, and repayment terms range from 3 to 24 months. Because your sales can fluctuate, there is no repayment date. Instead, you will pay back the advance at a pace that matches your business’s credit card and debit card sales.

What a business cash advance is used for.

If you consider this option, keep in mind that it is mainly used for short-term needs. It will not make much sense to get one if you need funding over a multi-year time frame. A traditional business loan with a longer repayment term would be better for that scenario.

Business cash advances are commonly used for inventory, payroll, taxes, repairs, marketing, and paying off debt. However, they can also be used to keep your small business afloat during a slow sales period. Or before a month or quarter that is poised to have increased revenues.

Business cash advance factor rates and fees.

The cost of your business cash advance will vary based on the lender you choose. The lender will pull fixed amounts on either a daily or a weekly basis based on a factor rate. Average factor rates range from 1.1 to 1.6. The factor rate will be presented to you during the pre-approval process; it will be determined based on the lender’s credit and approval requirements. A higher factor rate will result in higher fees.

Here is how it works. For example, if you have a factor rate of 1.25 and want to borrow $20,000, the lender will collect $25,000 ($20,000 x 1.25). In addition, you might have to pay origination fees and closing fees, so make sure you read the fine print in your agreement. Although this funding option has higher costs than a business loan, it can help out in a time of financial need, particularly when you need immediate access to funding.

How to get a business cash advance.

One thing that makes business cash advances so popular is their easy approval requirements. You might be able to qualify if you own a startup business or have a poor credit rating. The application process is quick and requires only minimal information about you and your small business. Plus, you will not have to put up any collateral or spend time digging up old business tax returns and financial statements. Most lenders can provide cash advances a few business days after everything is finalized and approved.

Repaying your cash advance.

There is no advantage to repaying your business cash advance early. You will only pay your lender a set amount of fees based on your business’s credit card and debit card sales, and early repayment will not reduce the amount of interest you owe.

Refinancing your cash advance or consolidating multiple cash advances might reduce your daily payments, but additional costs will be involved in structuring and setting up the new advance. Moreover, you might end up having to pay an early prepayment fee.

Alternatives to consider.

Funding is undoubtedly essential to the success of your small business, and so too is the type of funding you choose. Before committing to a business cash advance, consider alternatives such as short-term business loans, unsecured business loans, and working capital loans.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.