Merchant Cash Advance: Benefits

In the previous article, we have already seen what a merchant cash advance is. We also know how merchant cash advances operate.

However, it is important to realize that merchant cash advances are a very specific type of loan. These loans are generally preferred only by small and medium sized companies. This is because there are certain advantage as well as disadvantages which are associated with merchant cash advances.

In this article, we will have a closer look at the advantages as well as the disadvantages. The details of the same have been mentioned below:

Advantages of Merchant Cash Advance

The following advantages which accrue to merchant cash advance make it attractive to many small and medium retail companies.

1. Easy to Avail: The first and foremost benefit of a merchant cash advance is that it is easier as well as faster to avail. Traditional lenders undertake a lot of due diligence before they actually lend out any funds.

   It is common for lenders to have a look at the financial statements of the borrower before deciding whether or not to fund them. However, this is not the case when it comes to merchant cash advances. These advances are based solely on the credit card receipts of the borrower.

   Hence, other financial statements such as profit and loss statement as well as the balance sheet are completely irrelevant to these lenders. This makes it easier for small and medium businesses to obtain loans at a short notice. In many cases, businesses may not even have to go through a formal application process. In some parts of the world, businesses can instantly avail merchant cash advances by simply filling out an application form online.

2. Flexible Payments: The cash flow in retail businesses can fluctuate significantly. These fluctuations can be based on seasons or they may not even have an apparent cause. Hence, small and medium retail business find it difficult to stick to a particular repayment schedule.

   The advantage of merchant cash advance is that there is no fixed repayment schedule. The repayment schedule is based on the cash flow that the retail business is able to generate via credit card sales. Hence, as and when, the sales fluctuate, so does the loan repayment. This situation is favorable for small and medium businesses since they do not want to be exposed to possible default because of lack of cash flow.

   Flexible payments put less strain on the financial situation of the company and hence are preferred by small and medium retail organizations.

3. Credit Score Not Required: Small and medium sized retail companies may have come into existence only in the recent past. This could be one of the reasons that they do not have a high credit score.

   It is also possible that some of these companies may have run into financial trouble which would have reduced their credit score. In either case, these companies will not be able to obtain funding from traditional lenders on favorable terms. It is for this reason that companies which either have a short trading history or have faced some kind of financial debacle in the recent past are more inclined towards obtaining merchant cash advances.

4. Collateral Not Required: Merchant cash advances are secured against the future cash flows that the retail company is likely to receive. Lenders use the data about past sales to predict future sales revenues and lend against those revenues.

   The merchant cash advances are not secured against other assets of the borrower. This means that the lender only has a claim on possible future cash flows and not on any other assets. It is for this reason that borrowers are not required to submit any collateral in order to avail of these loans.

   The fact that no collateral has to be provided makes it an attractive proposition for many small and medium businesses who may not have any collateral to pledge in order to receive a loan. It is common for newer retail businesses to be bootstrapped. Such businesses tend to lease almost all their assets and may not own the assets required to pledge as collateral.

5. No Restrictions on the Usage of Funds: Another significant advantage of merchant cash advance is the fact that lenders do not place any restrictions of how borrowers can spend this money.

   Lenders give borrowers a free hand to utilize this money for any business purposes. This is opposed to traditional bank loans wherein the purpose for which the funds can be utilized is controlled.

   It is common for retail companies to use these funds to purchase inventory, fund marketing campaigns, pay back debts or even renovate the store premises. The added flexibility means that merchant cash advances may actually be more affordable if the funds are being utilized for certain purposes.

6. Scalability: Merchant cash advances are based on the sales revenue being generated by the retail organization. This means that as and when the revenues generated by these firms increase, their ability to borrow money also tend to increase simultaneously. This can be beneficial for small and medium retail businesses who are trying to raise funds quickly since they want to grow at a rapid speed.

Merchant cash advances have increased in popularity in the recent past because of several benefits that they offer. However, it is also important to understand and acknowledge the flipside of such advances. Details about the disadvantages have been explained in the next article.

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