Small businesses employ more than ninety percent of US workers and are a powerful force in the growth of local economies, unfortunately, most of them do not survive longer than five years. This means that entrepreneurs and small business owners must get creative with funding their company growth through both traditional and alternative lending options. One of these options is a merchant cash advance, which can help smooth out working capital and cash flow worries in the short term.

What Is It?

A merchant cash advance is funding given to companies of all sizes through an online lender and repaid through a percentage of daily card sales. This repayment is automatically deducted from the company’s bank account each day, avoiding the potential for late payments. The application process is usually all online with banking records submitted to prove how many card transactions the company handles and how much of an advance can be reasonably repaid during the term of the advance. Since this is not a loan, the company’s credit history is not usually checked or affected.

How Can Small Businesses Benefit?

Small businesses can use this type of advance to pay for time-sensitive growth opportunities, smooth out cash flow during a rough patch and much more. These advances can be easier to secure than a bank loan and take a fraction of the time to be approved, making them more appealing to most small businesses. Because a cash advance can be disbursed to your account within a day or so, many smaller companies can use them for emergency expenses without having to shut their doors or struggle waiting for a loan to be approved.

What Risks Are There?

The risks associated with this funding option are usually minor compared to the benefits, but some do exist. For instance, the interest paid on the advance are generally much higher than a typical bank loan and there may be added fees depending on the lender. Other risks include diminished cash flow over the course of the term because of the daily holdback.

A merchant cash advance is a good option for many small businesses that need working capital and cannot secure a traditional loan. This type of advance works by looking at daily card transactions to calculate the amount and then charging a daily holdback of a percentage of those transactions until the advance, interest, and fees are repaid. This can give you quick access to funds for growth opportunities and emergency expenses, but it may impact your cash flow.