There can come a time where your small business simply needs cash now and cannot wait for a slower type of loan. Everyone wishes their business would succeed right away and have all the cash flow they need, but real business owners know this is not the case.

For those tough situations, small business owners can use a merchant cash advance to get the cash they need. But how does this advance work and when should a business get one?

What Is a Merchant Cash Advance?

An MCA is an alternative to a traditional small business loan. It is an upfront payment of a sum of cash in exchange for a portion of future sales, typically credit and debit card sales. Because of this, an MCA is not technically a loan but a contract. 

Instead of making a fixed payment every month over a determined period of months, an MCA is paid daily or weekly until the advance and fees are paid in full. How much you pay in fees is determined by the factor rate, normally between 1.2 and 1.5 depending on your business. You will repay until an amount equal to the advance times the factor rate is paid. 

That’s what a merchant cash advance is, but when is getting one a good idea?

Small Businesses Prefer Speed

Many small businesses get MCAs because of their speed. Not everyone has time for a small business loan when an important expense comes up. An MCA with little documentation can be sometimes be obtained in as little as a week. However, this speed comes with the tradeoff of greater fees, so consider your options carefully.

No Physical Collateral Requirement

Merchant cash advances are unsecured, so they do not require collateral. This is great for businesses that are not in a position to offer collateral and risk losing it. However, you are still completely responsible for the repayment of the advance and contracts can be confusing, so be sure to read yours carefully so you have a full understanding of your MCA. 

Payments Tied to Sales

Since your payments are tied to the sales of your business, you will pay less when your business is slower. This is much different from a fixed payment schedule that you have to pay no matter how your business is doing.

There are a lot of positives and negatives to every financing option, so be sure to research all of your choices before committing. If your situation matches the reasons above, you may want to look into a merchant cash advance.