Updated: March 15, 2023
Obtaining a loan can be a lifesaver for many smaller businesses. However, it can be quite tricky if you have a poor credit score. Fortunately, a merchant service cash advance is often available to smaller companies, even if they have bad credit ratings.
Compared to when you apply for a regular loan, lenders usually take a more holistic approach to applications for merchant cash advance. They are more likely to look at your current earnings and turnover.
What is a Merchant Cash Advance?
In short, a merchant service cash advance is an advance that businesses can get from a lender. In exchange for a lump sum of money, the business agrees to pay the lender a percentage of debit card sales or daily credit card sales over an agreed period of time.
Generally speaking, the company is required to pay this fraction of its daily credit card transactions until the loan has been paid back in full.
Compared to financing options available at a traditional bank, a merchant advance may be more flexible in its terms and stipulations.
Merchant cash advance companies often look at a range of factors when considering whether or not to give business owners funding advances.
Among other things, the lender may weigh up the time in business, monthly revenue, bank statements, credit history, future credit, and line of credit of the business that has applied for a cash advance.
A merchant usually also has to provide evidence of cash flow, daily or weekly expenditures, months in business, and any relevant business financing options that the company has already applied for.
An MCA provider often weighs up the type of business that the applicant is, too. When funding merchant cash applicants, some types of small businesses can get funding approved in as little as 24 hours.
Other small business owners may need to wait much longer. The waiting time required to advance a merchant cash applicant also depends on the credit requirements of the funding organization itself.
What About a Small Business Loan?
If your business needs money fast, you may be considering applying for a small business loan instead of a merchant service cash advance. While this may be possible, it’s important to note that the requirements for qualifying for a small business loan are often much stricter than for a merchant cash advance. If your credit rating isn’t great, you might struggle to get a loan for your company.
This is due in part to the institutions that provide these loans. You generally acquire a merchant service cash advance from a lender, but banks often hand out small business loans.
Your business bank is often going to be reluctant to lend you money if your rating isn’t very good. Just because you have a bank account with a business bank doesn’t mean your company qualifies for the bank’s funding options if you have poor personal credit or business credit.
Another key difference between merchant cash advances and more conventional loans for small businesses is how interest is charged.
Lenders often use a factor rate instead of a traditional interest rate when they give merchant service cash advances. A factor rate is similar to an interest rate, but it is calculated differently.
However, a factor rate also expresses the rate of interest that you need to pay on your advances. It’s important that you consider this rate if you’re thinking about applying for a business cash advance.
Who is Eligible for a Merchant Cash Advance?
Most smaller businesses are eligible for credit merchant cash. However, whether or not you receive a business cash advance is ultimately up to the discretion of the lending organization.
As mentioned above, the lending institution examines a range of factors when deciding whether or not to give you business credit. Also, your company must be able to provide the lender with a portion of profits from your credit card transactions until the loan is paid off.
As such, your business must have sufficient cash flow to be eligible for this kind of business funding. You shouldn’t think of a cash advance of this type as a short-term solution to losses or lack of income.
Some merchant cash advances require a daily payment after you get approved until you have paid back the entire loan. They also almost always apply interest rates.
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How Do I Apply for a Merchant Cash Advance?
If you’re interested in business loans in general, you should investigate the short-term and long-term options available to you. To explore the types of merchant service cash advances you could be eligible for, contact local lending organizations in your area.
They can explain the criteria for qualifying for merchant service cash advances, as well as the kind of credit score and bank statements they are willing to accept.
The lending organizations can also explain to you how you need to pay back your loan. Depending on the organization, you might need to make monthly credit card deposits, share a portion of future sales, or pay the lender back from your credit card sales until the entire loan is paid off.
This is especially important to consider if your customers seldom pay with credit cards. Some lenders only accept repayments on advances from transactions made with credit cards.
Can I Get a Merchant Cash Advance With Bad Credit?
Most businesses are eligible for some type of merchant advance. The exact criteria vary from lender to lender. As a business owner, it is your responsibility to explore the options available to you. Consider the ability of your company to pay back the advance, too.
Think about your working capital, credit card sales, and potential future sales. It would help if you also explored other options that may be available to you. Depending on your personal credit and business credit, you may be eligible for a more conventional loan.
It’s also important to consider the cash flow required to acquire business credit with the lending institution that you have chosen. Some business owners use lump-sum business cash advances as a last resort to make up for shortfalls.
However, interest rates on the advance may mean you pay much more in the long run if business isn’t great.
