Merchant cash advances can be a great financing option for small businesses, providing quick and easy access to funding. However, merchant cash advances have risks and potential pitfalls like any financing option. Here are some do’s and don’ts to help small businesses avoid the pitfalls of merchant cash advances:
Do’s of Merchant Cash Advances
Evaluating the Lender’s Reputation
Do evaluate the lender’s reputation: Before accepting a merchant cash advance, it is important to evaluate the lender’s reputation. Small businesses should look for lenders with a good reputation for customer service, transparency, and fair lending practices.
Reading the Contract – A Crucial Step
Do read the contract carefully: Small businesses should carefully read the contract before accepting a merchant cash advance. This includes evaluating the terms and conditions, such as the repayment terms, fees, and interest rates.
Grasping the Repayment Structure
Do understand the repayment structure: Repayment of a merchant cash advance is made through a percentage of the business’s daily credit and debit card sales. Small businesses should understand how the repayment structure works and evaluate if it will impact their cash flow.
Wise Utilization of Funds
Do use the funds wisely: Small businesses should use the funds from a merchant cash advance wisely. This means evaluating each expense and determining how it will benefit the business in the long term.
Planning for Repayment
Do plan for repayment: It is important to plan for repayment of a merchant cash advance. Small businesses should evaluate their cash flow and ensure that they have enough revenue to cover the repayment amount.
Focusing on Growth Opportunities
Do focus on growth opportunities: Merchant cash advances can provide small businesses with access to funding quickly, making them a great option for taking advantage of growth opportunities. Small businesses should focus on growth opportunities that will benefit the business in the long term.
Don’ts of Merchant Cash Advances
Evaluating the Cost – A Must
Don’t forget to evaluate the cost: Merchant cash advances often come with higher fees than traditional loans. Small businesses should evaluate the cost of the advance before accepting it and determine if it is worth the cost based on the potential benefits.
Personal Expenses and Merchant Cash Advances – A Big No
Don’t use the funds for personal expenses: Small businesses should avoid using the funds from a merchant cash advance for personal expenses. This can lead to unnecessary debt and financial strain on the business.
Avoiding Excessive Debt
Don’t take on too much debt: While merchant cash advances can provide quick access to funding, it is important to avoid taking on too much debt. Small businesses should evaluate their cash flow and only accept an advance that they can reasonably repay.
Importance of Reading Terms and Conditions
Don’t ignore the terms and conditions: Small businesses should carefully evaluate the terms and conditions of a merchant cash advance. This includes understanding the repayment terms, fees, and interest rates.
Building a Strong Credit History
Don’t forget to build a strong credit history: While merchant cash advances do not impact the credit score, having a strong credit history can help small businesses obtain better financing options in the future. Small businesses should focus on building a strong credit history by making timely payments and keeping credit card balances low.
Making Hasty Decisions – A Potential Pitfall
Don’t rush into a decision: Small businesses should avoid rushing into a decision when it comes to merchant cash advances. It is important to carefully evaluate the terms and conditions and ensure that the advance is a good fit for the business’s needs.
Merchant Cash Advances – A Long-Term Benefit for Small Businesses
Merchant cash advances can be a valuable financing option for small businesses, providing quick and easy access to funding. However, it is important to carefully evaluate the terms and conditions of the advance and use the funds wisely. Small businesses should focus on growth opportunities, plan for repayment, and avoid taking on too much debt. By following these do’s and don’ts, small businesses can avoid the potential pitfalls of merchant cash advances and make informed decisions that benefit their business in the long term.