The Problem with Merchant Cash Advances

The Problem with Merchant Cash Advances

Merchant cash advances are a relatively new form of receivables financing. They have become an important source of cash for a growing number of small businesses. Relatively short approval cycles and apparent repayment flexibility are appealing, but they come at a price. In this workshop, you'll learn how merchant cash advances work and the conditions under which they might be a fit for your financing needs.

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3 Lessons

The Promise of Flexible Repayment

Unlike a term loan from a bank, merchant cash advances don’t have fixed repayment schedules. Rather, remittances or payments are a percentage of sales. That way, your payments will go down if sales are soft (though they’ll go up when times are good). Given the uncertainty endemic to young and small businesses, that kind of flexibility is valuable. It also has a price.

Not All Lenders are Good
Not all lenders are good, either.

Nothing New Under the Sun

Although new securities laws and technologies have helped shape and spread the newest forms of revenue-share loans, they have a long history. Merchant cash advances, for instance, are a form of factoring—a financial transaction in which a business sells its accounts receivable at a discount. Factoring has been around for centuries.

What is new is the emergence of payment processing companies such as PayPal, Square, Shopify, and others who have direct access to information regarding the credit card receivables generated by online merchants. Expensive, mail-based lockbox collection and processing has been replaced with automated, electronic transactions. As a consequence, even the smallest businesses have access to accounts receivable-based financing these days.

Pilot Your Own Ship

The mechanisms of business are lubricated by trust. We’d like to think that lenders and investors won’t make financing available imprudently. By watching out for their own interests, we hope that they will – in effect – watch out for ours. Many – maybe even most – will. However, it’s prudent to be equipped to make your own informed choices. Not all financing that is offered is worth taking, and the right choice for you may be very sensitive to specific conditions. This course will help you know what to look for.