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The ups and downs of using a cash advance to fund a growing business

Coming up with a viable business idea can be challenging, but realizing the dream is a different ballgame entirely.

Undoubtedly, the primary hurdle young entrepreneurs face is raising capital for their businesses. And as expected, they often turn to credit lines and bank loans, as these are the most popular resources in hand.

Despite being new, however, cash advances are proving to be an excellent alternative to mainstream funding solutions among startups and small businesses.

The concept of cash advances

Cash advances are monies received in exchange for a business’s prospective future sales. When granted, the provider obtains authority to draw out money from the processed credit card transactions of the enterprise.

Payments are made based on a fraction of sales called “holdback,” which can range from 5 to 20 percent of the revenue got from a sale. The holdback is agreed upon between the applicant and the provider before the advance is issued.

Because sales fluctuate, the amount payable to a cash advance provider also varies. When sales are high, the provider collects more money from the business, and when transactions are fewer, less money is remitted, and the advance takes longer to clear.

Benefits of cash advances

Many SME and startup owners prefer advances to loans because of several reasons.

For starters, applying for one is remarkably easy because you’ll never have to deal with a bank’s extensive credit reviews, collateral evaluations, and long forms. Merchant cash advance providers like First American Merchant offer simple online applications, which are processed quickly, with funds deposited into your account within a day.

Moreover, advances give you more control over the repayment process. Loans are typically serviced in fixed installments at the end of every month, but cash advances vary with the frequency of card transactions. You can, therefore, finish paying an advance faster by working to improve sales.

Limitations of cash advances

Although merchant cash advances have a lot to offer, not all small business owners are entirely sold on the idea. This lukewarm reception is mainly attributed to the interest rates, which are usually higher than what loans attract.

Additionally, because loan payments are fixed, bookkeeping is easier. You can plan your budget accordingly because you know exactly how much you’ll be paying at the end of the month.

The flexibility in paying cash advances, on the other hand, makes it harder to trace repayment activity. It’s harder to know how much of the advance is left unpaid when every time you finalize a sale, the provider gets paid.

Despite the drawbacks, cash advances have a lot more to offer new and small businesses than loans. They’re easy to apply, provide fast funding and are less a headache to repay.

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