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. Not having enough working capital can present your company with some big problems.

If you cannot afford to pay your staff and your suppliers, or stock up on much-needed inventory and supplies, you run the risk of failure. There are several funding options available to address short-term cash windfalls, one of which is a business cash advance. A common question asked of small business owners is, just what is a business cash advance? If you are not entirely sure, this Balboa Capital blog article is for you. 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, which is also referred to as a merchant cash advance, is not a loan for business. It is a financing solution that is designed to address the short-term cash flow needs of small businesses that have a high amount of monthly transactions. These include restaurants, coffee shops, small retail stores, and hair salons, all of 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 company’s sales can fluctuate, there is no repayment date with a business cash advance. You will pay back the advance at a pace that matches your company’s credit card and debit card sales.

What a business cash advance is used for.

If you are considering a business cash advance, keep in mind that it is mainly used for short-term needs. It would 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 the better choice for that scenario.

Business cash advances are commonly used for things like inventory, payroll, taxes, repairs, marketing, and paying off debt. They can also be used to keep your company afloat during a slow 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. Obviously, a higher factor rate will result in higher fees.

Here is how it works. 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). You might have to pay for origination fees and closing fees, so make sure you read the fine print in your business cash advance agreement. Although this funding option has higher fees 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 company. 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. Reason being, you will only pay your lender a set amount of fees based on your company’s credit card and debit card sales, and early repayment will not reduce the amount of interest you owe. This is unlike a small business loan, which can be paid off earlier if the loan contract does not include any prepayment penalties.

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

Alternatives to consider.

Funding is undoubtedly important to the success of your small business, and so too is the type of funding you choose. Prior to committing to a business cash advance, take a close look at the alternatives that have affordable rates, flexible repayment terms, easy qualification requirements, and fast turnaround times. These include short-term business loans, unsecured business loans, and working capital loans.