What to Know About Cash Advances for Small Businesses
Most small businesses have a keen understanding of the phrase, “It takes money to make money.” It can be frustrating to know that your company would almost certainly thrive if it weren’t for a temporary cash flow problem. You may have to turn away business because you don’t have the funds to fulfill orders or can’t afford the equipment you need to perform a particular service.
Being short on the money you need to make money is a common problem. You may be short on funds because your money is tied up in inventory or because you are waiting on customers to pay. Whatever the cause of the problem, a disruption in cash flow can be a serious detriment to your business. Cash flow problems cause a staggering 82 percent of business failures.
So, what can you do to overcome a financial bump in the road without letting it turn into an insurmountable obstacle? When your business lacks the funds it needs, it’s time to look outside of your business for financial help. There is always the traditional business loan, but loans like this require you to get approved, which can be difficult or impossible for businesses that have just started out or have some unfortunate credit history behind them.
The perfect solution for many small businesses strapped for cash is a cash advance. In this post, we’ll learn more about what a cash advance is, how it works and why you should consider seeking one out for your business.
What Is a Cash Advance?
A cash advance, also called a merchant cash advance (MCA), is a way to finance essential business purchases like new inventory, supplies or equipment when you’re short on cash. In most cases, you can get up to $250,000 from a cash advance loan.
Though a cash advance is often referred to as a cash advance loan, it isn’t technically a loan. It’s actually a sale of your future assets. When you know having access to cash right now would solve your problems and allow your business to make money, then you can sell a portion of the profit you stand to bring in to the MCA provider in exchange for the cash advance.
Because a cash advance is a different financial product from a loan, it’s a viable option for businesses that have applied and been turned down for a traditional business loan. This means issues like a low credit score or limited business history won’t keep you from being able to get a cash advance.
Like a short-term loan, cash advances are meant to be a quick fix solution that can help businesses right away. You get the cash you need, sometimes in as little as two days, and you pay the lender back relatively quickly — often within a matter of months.
Why Do You Need One for Your Small Business?
Based on the explanation above, you probably already have a good idea of why your business could benefit from a cash advance. Let’s look at three major reasons why your business might need a cash advance:
1. You Need Cash Now
The most basic reason to consider a merchant cash advance is that you need access to cash now. There are many reasons why you may need money right away. For example, one problem some small businesses run into is that they don’t have the money to purchase new inventory. You may have purchase orders that you can’t fulfill because your customers won’t pay you until you’ve paid to restock the products they’ve ordered.
If you find yourself in this scenario or another circumstance where you need money before you can make money, then a cash advance is a valuable option. You can pay your wholesaler or manufacturer and satisfy your customers. In turn, you’ll get paid and can pay back the MCA provider.
2. You’re Just Starting Out
Starting a small business takes both careful planning and a leap of faith. Before you can make any money, you need to fund all sorts of startup costs, such as your building, employees’ salaries, equipment, inventory and more. You may think at first that you’re all set but then run into additional costs you aren’t prepared for.
If you run into unexpected costs that you need additional money to pay for when you’re first starting out, you may apply for a loan and quickly find that it can be difficult to be approved for a loan when you haven’t been in business long. A cash advance can be a helpful solution for new businesses who need a little extra push to get some momentum going.
3. You Have Bad Credit
Another common reason why you may not be able to get approved for a traditional loan is if your credit score is too low. Business credit scores range from 0 to 100. If your business’s credit score is below 75, you may have trouble getting approved for a loan. You could also apply as an individual, but you’ll probably need your personal credit score to be around 700 for a small loan or closer to 800 if you want a business loan.
Your credit score is based on factors such as whether you pay bills on time, what your credit history is like and how much available credit you have. While poor decisions or mismanagement can certainly lead to a bad credit score, you may also experience difficult circumstances that are beyond your control. Whatever the reason for your low credit score, it won’t keep you from getting a cash advance.
How Do Cash Advances Work?
We’ve looked at the benefits of a cash advance, but how exactly does it work? Fortunately, the process is fairly simple. If you get approved for a cash advance, you receive your money in a lump sum right up front. There are two possible ways you can pay the provider back:
- You give them a portion of the proceeds from future debit and credit card sales until they are paid back. This portion will be expressed as a percentage.
- You allow them to debit your account on a daily or weekly basis until they are paid back. These regular payments are called Automated Clearing House (ACH) withdrawals.
Unlike a loan, with a cash advance, there is no set time in which you need to pay back the provider. You will simply continue to make payments in one of the two ways above until the provider has been paid back.
Of course, the amount you pay back will end up being a bit higher than the amount you were advanced. This is how cash advances can be mutually beneficial for businesses and MCA providers. The provider will determine what is known as a factor rate. When multiplied by the amount of cash you receive, this factor rate will determine the total payback amount.
For example, if your advance is $1,000 and the provider agrees to be paid back at a factor rate of 1.3, you will end up paying $1,300 back to the provider. The good news is that, even if it takes you longer than you had planned to pay back the amount, the advance won’t rack up any interest. The final amount you pay will always be set at $1,300.
The terms of the cash advance will outline how much money your business will receive, how much you will pay back and how you’ll make those payments.
What Are the Advantages and Disadvantages?
As with any form of financial assistance, cash advances come with some potential disadvantages, but they also have some advantages. Let’s take a look at the pros and cons of getting a cash advance.
When you research cash advances, you may see warnings of their pitfalls, but in many cases, these aren’t necessarily disadvantages unless you have a false expectation of what you’re getting with a cash advance. It’s important to understand that merchant cash advances:
1. Can Be Costly
Compared to other forms of financial assistance, cash advances can be expensive. Most factor rates fall between 1.1 and 1.5, so in the worst cases, you could end up paying 50 percent more back than you received. Look for a contract that includes a lower factor rate. The lower the factor rate, the smaller the percentage above your advance you have to pay back.
2. Come With Restrictions
Since MCA providers have a vested interest in your business being profitable, their cash advance contract may include some contingencies to help ensure that you can pay them back. For instance, you may not be allowed to close your store for an extended period of time or change locations.
3. Can’t Fix Long-Term Problems
Cash advances are meant to help businesses solve temporary problems so they can make money. When companies have ongoing issues with their cash flow, this is an indicator that some inherent problems in the business structure need to be solved. In these cases, a cash advance will only put a bandage on the problem.
4. Depend on Future Sales
This isn’t necessarily a disadvantage, but the future can be unpredictable. You may think that once you get your cash advance, your business will make plenty of sales and you’ll be able to pay the MCA provider back quickly, but there may be a chance your business won’t do as well as you expected and it will take longer to pay the provider back.
Cash advances also come with their fair share of valuable benefits, which is why they’re a popular option for businesses that need a leg up. Some of the pros of cash advances are that they:
1. Are Easy to Apply For
Applying for a cash advance tends to be a very simple, straightforward process. MCA providers don’t require much documentation from you, and what is needed, you can upload online. In many cases, you can complete the whole process online, so you don’t have to take the time to go to a bank or office. The terms of your advance should be clear so there’s no confusion or hidden costs.
2. Have High Approval Rates
Getting approved for a cash advance tends to be much easier than getting approved for a loan. You may have to provide a few months’ worth of your business bank statements or records of your past credit sales so the MCA provider can see that your business will do well enough to pay them back. They may also want to see your credit history, but the standards won’t be as high as they would be for a bank loan.
3. Get Money to You Fast
Cash advances are especially helpful when you need cash right away. After submitting your application to a provider company, you should hear back quickly. If you are approved, then you’ll likely get your cash advance within a week. Some companies may get it to you in as little as two days. This stands in stark contrast to the months it can take to get your money when you apply for a bank loan.
4. Don’t Require Collateral
If you open up a line of credit or get a loan, you have to provide at least some of your current assets as collateral in case you default on the loan or can’t pay back the creditor. You don’t have to do this when you get a cash advance, though. Since cash advances are unsecured, you don’t have to put any of your assets – either personal or business – on the line.
5. Accommodate Ebbs and Flows
Loans with fixed monthly payments don’t take into account the natural ebbs and flows of business. You may have some months where you do very well and others where sales are down. While some cash advances involve set payments, the more common model is that the provider gets a percentage of your credit card sales. This means, if sales are down one month, so is your payment to the provider.
How Does a Cash Advance Through NRS Work?
To get a cash advance through NRS, you can apply online. Just fill out the quote request form, and then a cash advance specialist will reach out to you to answer any questions you have, address any potential concerns and get any additional information needed to draw up a cash advance contract.
If you are approved, you’ll receive your money within two to three days. This means you can immediately put your cash to use to buy inventory, office supplies or equipment, or to use it for working capital. A cash advance gives you the money you need now so you can continue to be profitable in the future.