With small business loans more and more difficult to obtain, due to stricter qualification criteria, banks ending small business lending entirely, and the greater likelihood of a start-up going under in this taut economy, small business owners are turning to alternative sources to find working capital, and one of the most popular sources is the merchant cash advance.

If you’re new to the term, a merchant cash advance is not technically a loan. Rather, it’s an advance against future earnings. In most cases the amount of the advance is based on a proven track record of retail credit card transactions, and the advance is repaid via credit card factoring. This means that instead of a fixed monthly payment, you’ll be giving the cash advance provider a 15-20% cut of every credit card sale you make, until your advance has been completely paid off. Many cash advance funders require that you move your credit card processing to a company with which they’re affiliated, in order to make it easier to move this percentage, but some allow you to create a virtual “lockbox,” which is a special bank account all credit card payments are filtered into, and which is then “swept” by both your bank and the funders’ bank.

A merchant cash advance for small business owners has many advantages over a traditional loan. As mentioned above, qualifying is much easier, since no credit profile is required. Instead you just demonstrate a significant amount of credit card receipts over a specified period (typically $5000/month in volume over 9-12 months), and fill out a basic application. Most of the time there are no fees, and approval is usually very fast, with funds disbursed within 72 hours of approval. As well, the lack of fixed payments means that repayment amounts are proportionate to overall cash flow, rather than straining your company’s coffers in months when business is slow. Also important is the fact that the advance can be used for any aspect of your business: expanding your retail space, upgrading equipment, an extensive advertising campaign, or adding more staff.

While merchant cash advances may not be the best option for every small business, if your business does a significant amount of credit transactions (retail, salons, restaurants, for example), you may be the perfect candidate.

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