There are many types of unique financing that have become available for B2B businesses in the past few years, but business owners who sold directly to consumers didn’t have as many options. Now, however, some lenders are expanding their options. If you own a small business that takes credit cards and you are looking for a quick cash infusion, a cash advance is now a possibility. Read on to learn more about how a cash advance works and who it can benefit.

How Does It Work?

Unlike traditional loans with extensive paperwork and a long-term repayment schedule, a merchant cash advance is a way to get money quickly. The lender will look at your business credit rating, your personal credit rating and your recent cash flow statements. Based on that information they will offer you a loan between 5% and 20% of your estimated future business revenue.

Besides the loan amount, the lender uses your information to establish your factor rate. A higher factor rate is like a higher credit card APR. A low factor rate is 1.1, or 10% interest. Factors can go as high as 1.5, where you would repay the borrowed amount half again to pay off the loan. You can see from these rates that there is a price to pay for the ease of a merchant cash advance. 

Who Can Benefit From a Cash Advance?

Obviously, with the high repayment options, it’s clear that a cash advance should not be used lightly or in every situation. So, what business will actually benefit from a merchant cash advance? Consider whether the situation is a one-off or a regular occurrence.

A one-off emergency that you know the business can repay quickly and easily is a good reason for a cash advance. On the other hand, if you need new equipment or need to do a remodel, your business is likely better off relying on more traditional lending methods. If you have strong cash flow but your business credit is less than perfect, a cash advance can be a good way to get cash and build your credit back. 

It’s important to look forward in your own forecasting and make sure that repaying the cash advance will not require another cash advance. Instead, your business should be looking to this option for a quick fix to a quick problem, not a quick fix to a long-term cash flow issue. With the right planning, a cash advance can protect both your business and your credit.