Small businesses need funding in order to thrive, not only to support its day-to-day operations but also to finance unexpected but important expenses. Getting a bank loan is almost out of the equation in this scenario. After all, a bank loan would likely take weeks and sometimes even months to be processed. If you own a small café, you cannot afford to wait that long before you can get the money needed to replace broken kitchen equipment. This is where merchant cash advances come in. They offer an alternative means of financing for small enterprises.
Contrary to what many people think, a merchant cash advance is not a loan. It is a purchase of a fixed amount of a company’s future credit and debit card receivables.
The following are five reasons why merchant cash advances have become very popular among small businesses:
- Flexible and scalable
Repayment of a merchant cash advance would depend on the income of a business. This means that when a company’s income for the month is going strong, then the firm can pay back more. If the firm’s income is low, then it will pay a smaller amount.
This is very favorable to small businesses because they don’t have to shell out a significant amount for repayment during the so-called lean months.
- No restrictions on the use of money
In a traditional bank loan, small businesses have to use the money for specific purposes. In fact, the lender will be very strict about the use of the fund. It is not uncommon for banks to ask for proof that the money was used as specified in the loan application.
But in a merchant cash advance, the borrower has the freedom to use the money the way he/she sees fit. There are no restrictions on how the business will use the financing.
- No need for collateral
Another reason why businesses are attracted to merchant cash advance is because there is no need for them to offer an asset as collateral. It’s a lot different than a business loan where collateral is a must. Again, this benefits small business owners who don’t have real estate to tender as collateral.
- Ease of application
Banks are notorious for their strict credit requirements. These lenders also require extensive documentation, which makes it much harder for any business entity to comply. And bank loan applications can take months to be processed. This makes this type of financing not appropriate for businesses in need of immediate financing.
On the other hand, merchant cash advance lenders have very simple requirements. Moreover, funding can be made available to small businesses within a matter of days.
- High approval rate
Lastly, merchant cash advances have a higher approval rate compared to bank loans. Thus small business owners are more likely to get approved for this type of funding compared to applying for a business loan.