There are still many ways to raise capital, despite a credit crunch, and a slower economy. In this article, I will focus on the topic of merchant cash advances as a method of raising capital during the start up phase of your business. Many small business startups and entrepreneurs with a big dream and a strong business plan need a financial kickstart in the beginning in order to get the equipment that they need to put their ideas and plans into action.
In this economy, banks and other lenders have demanded high credit scores and long term relationships prior to lending. Start up entrepreneurs without a proven history of business acumen, earnings, and credit scores, oftentimes find it hard to find financing.
Merchant cash advances are one method of providing a quick jumpstart of capital in order for startups to “get their groove on”. Here is a quick summary of how they work, their risks, and their benefits for your startup process.
How Merchant Cash Advances Work:
Merchant cash advances (MCA’s) are typically offered to businesses as a lump sum in exchange for a percentage of their future sales. These deals actually are not loans, but a “purchase of sale of future prospective income”.
Typically, it is easier to get financing than traditional methods of credit based bank loans. Retailers or businesses end up paying a percentage of their sales so that there is no fixed amount to pay off monthly, despite lower sales months. This can decrease the stress of a fixed amount to pay monthly.
Cons: MCA’s often have high interest rates and expect high returns and hence are riskier than traditional loans. MCA’s require that a percentage or portion of your future earnings that are redirected back to the providers. This is also a newer industry, with less regulations, and at times with broader more ambiguous clauses.
Overall, the jury is still out on this very young method of financing your small business venture. The great thing is that merchant cash advance businesses are more interested in growing or improving their clientele’s business to ensure that their client’s business does not go out of business, therefore taking a loss. If you are thinking of this as an option for starting or growing your business, do weigh carefully the pros and the cons and be sure to do some more reading, gathering information on legalities, advice, and meeting with the personnel.