What to Know About Cash Advances for Small Businesses
Although a cash advance is commonly referred to as an advance loan, it’s not actually an actual loan. It’s actually the sale of the future assets you’ll have. If you’re confident that the cash you need right now can solve your financial issues and help your business earn money, you could sell a part of the profits you earn to your MCA provider for your cash advances. Since cash advances are different from the loan and is a viable alternative for companies that have tried to apply but were rejected for the traditional business loan. It means that having a poor credit score or a limited experience in business won’t stop you from being able obtain a cash advance. Similar to a loan for short-term use, cash advances are intended to be a quick and easy solution that will benefit companies right away. You can get the money you require, usually in just two days, and then repay the lender quickly, often in the space of a few months.
Why Do You Need One for Your Small Business?
Based on the information above You should have an idea of the reasons why your company could profit from cash advances. Let’s take a look at three main reasons that your company may require a cash advance.
1. You Need Cash Now
The primary reason to think about a cash advance is that you require access to cash today. There are a variety of reasons you might need cash now. One example of a problem that small-sized businesses face is the fact that they do not have enough cash to buy new stock. There may be purchases that you cannot meet because your clients won’t be able to pay until you’ve made a payment to replenish the items they’ve placed an order for. If you’re in this or any other situation where you require money prior to making money and earn a profit, then cash advances are an option worth considering. The cash advance can be used to reimburse your supplier or manufacturer and please your clients. In return, you’ll be the money and pay the MCA supplier.
2. You’re Just Starting Out
The process of starting a small-scale business requires an arduous planning process and the decision to take a leap of faith. Before you are able to make profits, you’ll need to finance all kinds of expenses associated with starting up, including the building, your employee salaries, the purchase of inventory, equipment and more. It’s easy to think that you’re in good shape, but you’ll soon discover additional expenses that you’re not ready for. If you encounter unexpected expenses that require more money to pay for as you begin your journey then you could take out a loan, but quickly realize that it could be difficult to get approved for a loan, especially if you’re not in business long. Cash advances can be beneficial for companies that require a bit of more push to get momentum rolling.
3. You Have Bad Credit
Another reason you might not be approved for a traditional credit loan is that the credit score is not high enough. The business credit scores vary between 0 and 100. If your company’s credit score is lower than 75, you might not be approved for loans. You may also be able to apply for a loan as an individual, however, you’ll likely require the personal credit score to reach at least 700 to qualify for a small loan or close to 800 for an enterprise loan. It is important to note that your credit score is determined by aspects like how often you pay your the bills in time, how your credit history is and the amount of credit available. Although poor choices or mismanagement will certainly result in an bad credit score, you might also encounter difficult situations that are out of your control. Whatever the reason behind your poor credit rating, this shouldn’t stop you from getting the cash advance you need.
We’ve examined the advantages of cash advances but what exactly does it mean? The process is relatively easy. If you are accepted for cash loan, you will receive the money in one lump sum from the beginning. There are two ways to pay the service back:
- You pay them a percentage of the profits from any future debit or credit card transactions until they’re paid back. This amount is expressed in percentage.
- They can take your money from your account and debit it on a weekly or daily basis until they pay back. These periodic payments are referred to as Automated Clearing House (ACH) withdrawals.
In contrast to a loan, when you take cash advances there isn’t a set date when you have to repay the lender. It is simply a matter of continuing to pay using one of the two options mentioned above until the lender is fully paid. Naturally the amount you repay will be slightly more than the amount you received. This is the reason why advance cash can prove beneficial to businesses as well as MCA companies. The MCA provider will decide what is known as a factor percentage. If multiplied by the amount the cash received, that rate determines the total amount you pay back. For instance that if you receive $1,000 and the service provider accepts repayment with a factor of 1.3 then you’ll have to pay $1,300 to the service provider. The good thing is that regardless of whether it will take longer than you intended to pay the money, the advance will not accrue any interest. The amount you are required to have to pay will be fixed at $1,300. The conditions of the cash advance will specify how much your company will receive and how much you’ll repay and how you’ll pay for those loans.
Advantages & Disadvantages of a Small Business Cash Advance
Like any other type of financial aid cash advances are not without certain disadvantages, however they also offer some benefits. Let’s examine the advantages and disadvantages of taking an advance on cash.
If you do some research on payday loans, you might find warnings about their risks However, in the majority of instances, they aren’t actually disadvantages unless there is an unrealistic expectation of the benefits you’ll receive from the cash advance. It is important to know that cash advances from merchants:
1. Can Be Costly
In comparison to other types of financial aid The cash advance can be costly. The majority of factor rates are between 1.1 to 1.5 and in the worst case scenario you could be spending 50 percent more than you actually received. Choose an agreement that has an lower factor rate. If the rate is lower, lower the percentage over the amount you are required to repay.
2. Come With Restrictions
Because MCA providers have an vested interest in ensuring that your business is profitable, their cash advances contract could contain certain conditions to ensure that they will pay you back.For instance, you might not be permitted to close your business for a prolonged time period or to change the location.