Merchant cash advances are a popular funding option for construction businesses that require rapid access to capital. With a merchant cash advance, a lender advances a lump sum payment to a business which is then automatically repaid using a percentage of daily credit card sales. When your business takes a cash advance, it gains a rapid infusion of cash at the expense of reduced future cash flow until the advance is repaid.
There are several pros and cons of merchant cash advances which you have to consider before deciding if this is the right borrowing decision for your construction business.
Pros of Merchant Cash Advances
1. Quick Funding
Commercial loans from a bank can take weeks or even months to get approved. That’s not the case with merchant cash advances. Merchant cash advances are considered fast loans for business. These loans get approved quickly and funding is usually available within days, maybe even 24 hours or less. That’s certainly great for construction businesses that require immediate access to capital to take advantage of limited-time opportunities.
2. Lenient Qualification Requirements
Most bank loans require strong business credit score as well as a high personal credit score. With merchant cash advances, you will often find you can secure funding with more lenient qualifications. The ability of a business to get approved depends more on their credit card sales and experience in business. This is why a merchant cash advance is a good option for well-established construction companies that have a stable history of credit card sales.
3. No Collateral
Traditional business loans from a bank require collateral. The collateral protects the bank in case the borrower defaults on the loan. Merchant cash advances don’t require you to provide physical collateral. In effect, your credit card sales are your collateral.
Cons of Merchant Cash Advances
1. More Expensive
Merchant cash advances can be one of the most expensive financing options on the market. The high interest rate and fees associated with a merchant cash advance may make it difficult for a borrower to repay them in the same timeframe as other types of loans.
2. Impact on Cash Flow
Lenders of merchant cash advances deduct funds from your daily credit card sales. This impacts your cash flow by reducing it until the advance is paid off. If you have already experienced cash flow issues in the past, a merchant cash advance may not be your best borrowing option.
3. Unregulated Industry
Merchant cash advance lenders operate in an unregulated market which allows them to charge higher interest rates. Moreover, there may be hidden costs associated with merchant cash advances. Be sure you understand all of the conditions and costs involved before securing a merchant cash advance for your business.
The Final Verdict
Construction business owners should carefully consider the pros and cons of merchant cash advances so that they can make a sensible decision. A merchant cash advance may be a good option if you can’t qualify for other loan options or need access to capital in a short time. However, if your construction company can’t afford the extra fees and interest, or if you sometimes experience problems in your cash flow, other lending options may be a better option.
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Founder Dinis Guarda
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