When the economy took a turn for the worse a few years ago, it became increasingly difficult for small businesses to get financed through the traditional bank loan.
In the lending gap that these loans left behind, merchant cash advances have become increasingly popular, allowing local businesses and start-ups to grow and expand regardless of their credit. Today, the industry for merchant services is valued at about $5 billion — a significant growth since these types of services first appeared in the late 90s, according to a November 18 WBEZ 91.5 article.
While merchant services can allow a smaller business to get the financial boost it needs to grow, it’s important for these businesses to understand the realities of the financial agreements they’re getting into.
It’s true that there are many benefits to merchant services — but as with anything, there are drawbacks to seeking out a cash advance from a merchant service company, WBEZ 91.5 reports.
To pay back a merchant cash advance, a business typically agrees to give the merchant services firm a certain percentage of its daily credit card sales. And if there aren’t any credit card transactions made on a given day, no money will be withdrawn. It will take the business longer to pay back its cash advance if this happens, but it won’t put the business into debt.
But the other common repayment plan that merchant service firms employ is done through withdrawing a certain amount of money daily from the business’s account, even if the business has no sales that day. This repayment scheme can be bad for small businesses going through a particularly rough patch, so it’s important for businesses to understand the details of their cash advance agreement before signing any contracts.
Despite the risk, the benefits of a merchant cash advance are hard to ignore, especially for smaller businesses looking to expand their operations and thrive rather than struggling to get by from day to day.