Who uses business cash advances and why?
Almost any business that processes credit cards and needs quick cash can use business cash advances.
The top candidates are typically retail or restaurant businesses that have difficulty securing traditional business loans. Banks and other lenders are wary of these types of businesses because of their high mortality rate, especially during their first two years. Business cash advances provide immediate funding to help these businesses succeed.
Cyclical businesses, like florists and tourist attractions, also rely on business cash advances to buy new inventory. Since these types of businesses experience seasonal lulls, a cash advance ensures they're ready when customers return during the busy season.
Keep in mind that this type of financing is a short-term solution intended to help grow your business, not to sustain it. If you use business cash advances as a way to meet payroll or keep your company afloat, you risk overextending yourself.
Benefits of business cash advances
- Limited restrictions - None of the typical loan requirements such as collateral, application and processing fees, or personal guarantees are required, providing you with a greater chance for approval.
- Possible tax advantages - Since business cash advances are considered purchases, you may be eligible to write off the expense (but check with your accountant first).
- Speedy funding - Funds can be wired to your account as quickly as 72 hours after approval.
- Ebb and flow repayment process - Instead of maintaining a fixed repayment schedule, your payments are based on a percentage of your daily credit card transactions.
- Minimal credit impact - Applying for a business cash advance doesn't show up on your credit report so you won't negatively impact your rating.
- Low risk - The provider assumes most of the risk for this transaction; if you go out of business, the provider doesn't have much recourse to get their money back.
Drawbacks of business cash advances
- High rates/fast repayment - A cash advance is an expensive funding source that must be paid back within 6 to 8 months. Since the industry is largely unregulated, there's no cap on how much a provider can charge on an advance.
- Certain businesses won't qualify - Few providers will fund start-up companies or home-based businesses. You may also struggle to get a business cash advance if your net credit card receipts are below $10,000/month.
- Cash advance limits - The amount of the advance is solely based on recent credit card statements, which may not provide sufficient funding for your needs.
- Must maintain consistency - If the provider sees that your business is falling off or notices unusual activity, such as lower-than-normal credit card processing or more cash transactions, your account may go to a collection agency for repayment.