Exploring The Best Cash Advance Options for Small Businesses

Businesses in need of quick money who don’t want to go through an extensive credit check might consider a cash advance for access to capital. A cash advance can cover short-term expenses and fill in for cash flow gaps—however, it’s important to note that this type of financing is pricey. 

For this reason, industry and finance experts suggest using cash advances only for short-term needs—or, better yet, finding an alternative solution. 

This article will cover information on merchant cash advances and help you explore other options available for your small business.

What is a cash advance, and how does it work?

A merchant cash advance is a form of business financing designed for small businesses that works as an alternative to traditional bank loans. Its model is similar to invoice financing. 

Businesses who seek this type of funding typically do so when they need quick cash, usually when sales and revenue are low but there are still bills to pay. 

A cash advance provides businesses with a lump sum based on past sales and future projections, with tailored repayments, interest, and fees. Businesses that have high sales have a better chance of securing larger cash advances. 

The application process does not require a credit check, and it typically takes a few days to receive the money. Because it’s a more expensive option though, many businesses only use cash advances as a short-term solution, as the interest can build quickly. 

How a merchant cash advance works 

The payment processor first determines the amount of the advance to be given based on previous sales and future projections. 

Lenders do not charge an annual percentage rate (ARP) like in the case of other traditional loans. Since the payment processor does not charge an ARP, a factor of the business’ daily sales will determine the fee they must repay. This factor is usually between 1.1 to 1.5%. 

Your industry, the years your business has been in operation, the finances of your business, and your personal credit history can also determine access to more advanced fee structures. 

There are two types of merchant cash advance repayment structures: a percentage of debit and credit card sales or fixed withdrawals from a bank account.

Repayment with a percentage of debit and credit card sales sees the lender automatically deducting a percentage of your card sales each week until your advance is paid off in full. In this case, there isn’t exactly a “repayment term”—rather, the fees are withdrawn until the amount is fully paid off. Typically, this takes anywhere from 3 to 18 months. The higher your sales, the shorter the amount of time to pay off the loan. 

In the case of fixed withdrawals from a bank account, the lender withdraws the same amount of money from your bank account daily, weekly, or monthly, regardless of how many sales you’re making. This amount is determined based on your average monthly revenue. The benefit of this structure is that you can determine how much you owe every month. It’s also advantageous for businesses that have more cash transactions than credit or debit sales. 

The drawbacks of getting a traditional cash advance

There are many disadvantages to opting for a traditional cash advance. Here are just a few of them.

High fees

Merchant cash advances charge some of the highest fees, making it one of the most expensive forms of financing. The time it takes to pay back the loans can vary depending on the size of the advance and the lender. Additionally, the fees can be difficult to calculate because the factor can differ greatly depending on credit and debit sales. 

Repayment terms

Weekly or daily repayment terms can seriously affect your cash flow. Frequent repayment terms could result in you entering the debt cycle where you end up needing more cash advances because you can’t keep up with the high costs of your current one. 

Little regulation 

Merchant cash advances are not federally regulated in the United States because they’re not classified as a traditional loan—rather, they’re considered a commercial transaction. Because the Uniform Commercial Code regulates them in each state, regulation can vary, and small businesses may be at risk to predatory companies. 

Confusing contracts 

Varying factor rates and repayment schedules can make cash advance contracts confusing. Some states have made it mandatory to enforce transparency in contracts; however, whether you receive transparency really depends on your business’ location.

Predatory lenders

With traditional cash advances, the lender has control. This means they can demand more from you (such as collateral), require a certain credit score or credit history, write unreasonable contractual terms, or charge outrageous interest rates. 

An alternative solution: Silo Cash Advance

Silo Cash Advance provides small and medium-sized businesses with better access to working capital. With more cash on hand, you can make strategic investments in your operations and take your business to the next level. 

Unlike traditional bank loans that are designed to support large corporations and traditional cash advances that prey on a business’ vulnerabilities, Silo’s reliable and trustworthy capital solutions allow small and medium-sized businesses the opportunity to act on time-sensitive opportunities, while keeping their agency intact. 

If you’re planning on breaking into new markets and purchasing new products, investing in infrastructure, vertically integrating your business, upgrading your business processes, or launching a brand, you’ll need the right amount of cash on hand to do so. That’s where Silo comes in.

We align your opportunity with dynamic availability and offer a flexible repayment structure so that you don’t lose the ground you’ve gained. We’ll work with you to determine the most cost effective approach and continue to scale your availability based on your projected  business’ growth. 

Our standard repayment period is three to six months, with no mandatory repayment on your first month. 

Let us show you what’s possible. Leverage new business opportunities and pay outstanding expenses quickly with Silo’s Cash Advance.

Book a demo through our web page today!