Debunking Three Myths About Merchant Cash Advances
Posted by SCOTT GRIEST
16 March, 2018
If your business needs additional working capital, a merchant cash advance is a good option when you need quick financing at a rate you can afford. However, due to myths and misconceptions, some business owners don’t consider merchant cash advances when looking for business financing. We will address and debunk a few of these myths.
Myth #1: The Rate Is Exorbitantly Expensive
The largest drivers to determine a cash advance rate are risk and term. The greater the risk and the longer the term the more expensive the financing. At Rapid Capital Funding, we use our own proprietary risk models based on providing hundreds of millions of capital to Main Street America over the past decade. We look well beyond a business owner’s FICO score. Quite often, the cost of capital is much lower with us when compared to traditional lenders.
More important to us is structuring a contract and repayment of the financing that leaves the business in a better financial position at the end of the contract. In fact, we won’t make an offer unless we are highly confident that a business will survive and thrive in order to pay back its obligations.
Myth #2: Merchant Cash Advances Are Loans
Although the process of acquiring a business loan and merchant cash advance are similar, they are completely different financial instruments. Business loans generally have a longer commitment with a fixed repayment schedule. In comparison, merchant cash advances are remitted based on a set percentage of your business’ cash flow. So when your sales are up, we collect more and you repay faster. When sales decrease, just the opposite happens.
Often a merchant cash advance is much more beneficial than a loan for businesses because they need payments to correspond to their cash flow. This is especially true for seasonal businesses which often have a high risk of default on traditional loans since their ability to repay a fixed payment is challenging in the slow season.
Myth #3: Only the Desperate Use Merchant Cash Advances
For whatever reason, people assume that only failing businesses pursue cash advances. In reality, it’s quite the opposite. With bank rejection rates for small business loans reaching close to 80%, traditional loans aren’t always accessible to small business owners. When a applying for a merchant cash advance, rejection rates are less than half that of banks.
For the majority of our clients, the benefits of speed, flexibility and customer service are the key drivers to their pursuing a merchant cash advance, which will enable them to capitalize on opportunities with the fuel to grow!
Is a Merchant Cash Advance Right for Your Business?
Only you can determine whether a merchant cash advance is right for your business. Before you decide, it’s important to understand the truth about the product and all the terms and costs for acquiring the capital. Make sure you use a reputable company that thoroughly explains all the fine print so you can make an informed decision.