Business Cash Advance — it kind of conjures up images of those ‘payday loan’ type businesses. Not quite. A business cash advance is a relatively new option in the area of business lending.
A business cash advance works with a merchant account and credit card sales. It lets a business borrow cash against future credit card sales. The borrower gets a lump sum amount in exchange for an agreement. The agreements vary, but generally they stipulate that a percentage from each future credit card transaction will belong to the business cash advance company. This will continue until such time as the amount borrowed is paid back. (It’s somewhat similar to ‘factoring’ in AR).
One advantage to this type of borrowing is that the business can get capital very quickly compared to other types of borrowing (such as a business loan or a business line of credit). From the perspective of the business cash advance company, it’s a lower risk than standard lending agreements so that lets them get funds to the business quicker. Also, this type of borrowing usually does not depend on the borrower’s credit history as other types of lending do.
The big disadvantage of a business cash advance is the price you pay for this type of borrowing. Rates are in typically in the 25% range! So that means you will give up a significant portion of your credit card sales revenue to the business cash advance lender until the amount is paid off. In order for this to work, the business would need to have some pretty decent margins on each sale to absorb the impact of that extra 25% (or whatever it happens to be). Otherwise, you’d be in the red and that’s not good.
If you need capital for your home-based business, this might be an option to consider. But make sure you fully understand the terms and do the math before you jump in!