Business Cash Advance: Use With Caution

Small business loans are the lifelines of millions of American small businesses. With 28 million small businesses across the country and 543,000 joining their ranks every month, there is certainly no shortage of aspirational business owners looking to earn their livings in the small business world. More than half are home-based, yet so many still struggle to come up with the funds to keep their companies operational. In fact, 38% take out business loans just to maintain their inventories.

Unfortunately for many of those small businesses, business loans can be difficult to obtain. That’s why millions are turning to merchant cash advance companies that provide immediate funding in exchange for interest profits on future credit card transactions. Business cash advance can be incredibly helpful for small businesses needing to cover costs in the short term, but they have some experts feeling a little nervous.

Business cash advance do present an excellent opportunity, as long as they’re used carefully. Banks and traditional lenders have made loans more difficult to obtain, but that hasn’t stopped the need for capital. Cash advance companies have been able to meet that need, but at a certain price. For example, a financing company might pay a retailer $20,000 up front in exchange for the collection of $28,000 in future credit card receivables at a daily collection rate of 10%. The money is there when the retailer needs it, but the retailer pays $8,000 in the long-run for the privilege of borrowing.

Still, the appeal isn’t difficult to see. Because payments are made at a percentage basis, small businesses don’t have to worry about the possibility of falling short on a monthly payment amount. In an article for On Deck, one business owner who took out a $10,000 advance in exchange for $14,000 at a payback rate of 24% explained, “I’m probably spending more money than I would on a conventional bank loan, but I don’t miss it. It comes out whether I have a $25-dollar day or a $2,500-dollar day.”

The concerns of some financial experts are mainly related to the potential for predatory practice. Though business cash advance can be great tools for some companies, especially seasonal businesses that experience highs and lows during the year, those businesses need to be cautious. Be sure that you can afford the terms, and confirm that the payback percentage remains fixed. Business cash advance are deserving of a healthy respect, and they certainly aren’t something to write off immediately.