Small Business Cash Advance: A Guide

Disclaimer: Information in the merchant cash advance articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the merchant cash advance articles often covers financial products that Biz2Credit does not currently offer.

Running a small business can be unpredictable. As your business grows, so do your expenses and nobody can see the future. Business needs change over time, emergencies arise, and you never know when you may need an influx of cash for your business.

While traditional funding options like term loans can help small businesses grow and cover costs, they often have high eligibility requirements, long processes, and can saddle a business with long-term debt.

If you’re in need of fast funding, a small business cash advance can increase your cash flow and help you cover immediate costs. Whether you’re just starting to explore small business loans near me or you know your business needs fast cash, we break down this type of financing here.

In this article:

• Learn what a small business cash advance is and the advantages over other small business loans.
• Explore how businesses can use a small business cash advance.
• Understand the process of qualifying for and repaying a business cash advance.

How a Business Cash Advance Works

A small business cash advance is a synonym for the more commonly used term, merchant cash advance (MCA). In this small business financing option, a business merchant cash advance provider gives an approved borrower an upfront lump sum payment in exchange for a percentage of future sales.

In most agreements, a borrower makes payments via future credit card sales and debit card sales. As such, a small business cash advance allows you to repay funding based on how well your business is performing.

A small business cash advance differs from a loan in a few key ways:

• Fast funding: The main advantage of a business cash advance is that, if approved, you may be able to receive funding in your business bank account on the same day you apply.
• Factor rate: Rather than repay the loan amount with interest, MCA business funding uses a factor rate. This number, typically between 1.1 and 1.5, is multiplied by the funding amount to reach the total repayment number. For example, a $10,000 loan with a 1.4 factor rate will have a total repayment of $14,000, plus additional fees.
• Frequent payments: Rather than monthly payments, a small business cash advance usually demands weekly or daily payments based on credit card sales or other accounts receivable.
• Less regulation: Since MCA agreements are between two companies rather than a traditional lender and a company, there are fewer regulations on business cash advances. However, it’s a competitive industry so MCA providers tend to regulate themselves to provide better services.

How Small Businesses Can Use a Cash Advance

Unlike some types of business financing, small business cash advances have very few restrictions. They’re used for a wide range of reasons, in a wide range of industries, because you can really use the money how you want.

Some of the most common ways businesses use cash advances include:

• Cash flow: A cash advance can help businesses meet operating costs and maintain working capital during periods of inflation or economic downturns.
• Emergency financing: Cash advances help businesses cover unforeseen expenses, like surprise maintenance costs or emergency supplier changes.
• Purchasing inventory or raw materials: Whether you want to take advantage of a liquidation sale or wholesale opportunity or customer demand is rising, a cash advance can finance inventory or raw materials purchases.
• Seasonal support: Businesses that deal with seasonal downturns, like restaurants in vacation towns, often use small business cash advances to keep the doors open through slow periods.
• Marketing and growth activities: Product going viral on TikTok? A small business cash advance can finance additional marketing materials, help you hire new people, and cover increased production costs.

This is really just scratching the surface, too. Whatever your business needs, a small business merchant cash advance can help.

How to Apply for a Small Business Cash Advance

One of the main advantages of a small business cash advance over traditional forms of financing is the application process. Not only are eligibility requirements lower than traditional bank loans or U.S. Small Business Administration (SBA) loans, but it’s also much faster.

While every MCA provider is different, the process typically goes like this:

1. Research options: Search small business loans near me to find both local and national MCA providers and compare terms, advance amounts, and customer reviews.
2. Apply: Most cash advance companies let you apply online with a streamlined process. If you provide business details, detailed bank statements, and submit to a credit report, your application may be processed faster.
3. Approval: Many MCA providers offer same-day business funding, so if you get approved, you could get the money within 24 hours or a couple of business days.
   
   

While it’s easier to qualify for a small business cash advance than a traditional short term loan, merchant cash advance companies and online lenders don’t approve everyone. You’re more likely to get approved quickly if you have a good credit history and strong monthly or annual revenue reports.

How to Repay a Small Business Cash Advance

Unlike a term loan, which has fixed monthly payments, a small business cash advance requires frequent, variable payments. It’s all based on your sales, so if business is slow, you might barely pay anything.

A common repayment schedule is based on daily draws, taking a percentage of your daily credit card receipts each day until the loan is repaid. Some companies prefer to do fixed payments based on estimated monthly sales. In both cases, you’ll likely also pay origination and other additional fees.

Regardless of how your small business merchant cash advance agreement is set up, it’s important to keep the following strategies in mind to pay it back:

• Read the fine print: Always look over an MCA business funding agreement with your lawyer and accountant to make sure your business can meet the terms.
• Never take more than you need: Only apply for a funding amount that you know you can repay in a timely manner and agree to terms that won’t cut too deeply into your profits.
• Budget early: As soon as you know the repayment terms, start allocating budget to meet each payment. Depending on the size of the funding, you may want to cut expenses in other parts of the business to repay the loan on time. (Or ahead of the repayment period if there are no prepayment penalties.)

Conclusion

A small business cash advance is a great option for startups and business owners with bad credit due to the lenient qualification requirements and fast funding. However, you should always do your research to make sure you’re working with a reputable company and never sign an agreement without reviewing it with a lawyer and accountant.

When you’re in the market for a small business loan, a small business cash advance can help your business cover emergency expenses, invest in growth, and much, much more. Organizations like Biz2Credit specialize in merchant cash advances with fast approval processes to get your company the money it needs to navigate emergencies and take advantage of business opportunities as they arise. 

FAQs

What is a small business cash advance?

A small business cash advance, or a merchant cash advance (MCA), is a type of funding in which a cash advance company gives a borrower an upfront lump sum payment in exchange for a percentage of future sales. Rather than an interest rate, a cash advance uses a factor rate to determine the total loan repayment amount.

Is it easy to get a small business cash advance?

Yes, one of the primary advantages of a small business cash advance is an easier approval process. There are lower minimum personal credit score requirements, time in business requirements, and monthly revenue requirements than traditional bank loans.

How do you repay a small business cash advance?

Typically, you repay a small business cash advance with daily or weekly payments based on your credit card transactions. However, in some arrangements, you may also repay a fixed monthly amount based on revenue estimates.

How can you use a small business cash advance?

You can use the money from a cash advance on just about any business need. Small businesses often use cash advances to:

• Cover emergency expenses
• Consolidate debts
• Invest in growth activities
• Purchase inventory or equipment
• Navigate seasonal slowness
• Increase cash flow

What are the advantages of a small business cash advance?

Some of the key advantages of a small business cash advance include:

• Fast funding
• Easier approval process
• Flexible repayment terms

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