When considering additional finance for a small business, most business owners do not think of a merchant cash advance right way. This method of funding is not as well known, and therefore people often make assumptions about what a cash advance entails. Below you can find the most popular myths surrounding cash advances and an explanation of what cash advances are.
Myth #1: Merchant Cash Advances Are The Same Thing As Loans.
The biggest myth to be exposed is that a Merchant Cash Advance is not a loan. Merchant Cash Advances involve a lot less hassle than what is required to obtain a traditional business loan. With business loans, you are often required to jump over hurdles to obtain a loan, like a lengthy process or having to give personal collateral.
Merchant Cash advances also offer a more flexible payment schedule. With Business payments, you have a fixed schedule as well as penalties for missing those payments. To repay back a Merchant Cash Advance your lender will take a daily fixed percentage of your credit and debit card sales. Whether your sales are low or high, you will not be penalized. With a merchant cash advance, you will not be able to afford your payment, regardless of whether your sales go up or down.
Myth #2: The Interest Rate Is Ridiculous
With a merchant cash advance, there is not a traditional interest rate. Instead, your lender will take a small percentage of your future debit and credit card sales.
This percentage, also known as the retrieval rate, is decided between you and your merchant cash advance lender. The percentage is based on a variety of factors such as the volume of the business, sales, projected income, and the requirements of the funder. The retrieval rate averages between 5 to 15%, but depending on your lender or your situation it could be higher or lower.
Myth #3: Only Businesses in Desperate Situations Use A Merchant Cash Advance
It is often assumed that cash advances are only for failing businesses; in reality, cash advances have been popular for successful business who are looking for some additional working capital.
Often businesses like restaurants, bars, or retail establishments will be the first to utilize cash advances. Rob Starr of SmallBizTrends.com explains that businesses often use this when launching a new product, making renovations, or expanding. Since cash advances are available so quickly, a business can use it almost right away and start making a profit faster.
It is important to understand that everything you hear about cash advances is not true. Conducting thorough research will help you to realize that a merchant cash advance is a great way to boost your business and one of the best options for funding.