It happens from time to time – you've found yourself in the midst of a cash flow crunch.
Any kind of circumstance – unforeseen as they usually are – can cause you to need accessible cash, and fast.
Regardless of why your cash flow crunch appeared, if you don't qualify for a traditional business loan, a merchant cash advance (MCA) might seem very attractive face value. Let's examine what this is and how it can help – or hinder – your business finances.
MCAs are advances against your future sales and revenue. Despite its appeal, it's easy to apply, and normally you'll have access to a lump-sum payment in just a day or two.
But, as it is with many things in life and in business, just because you can doesn't mean you should.
3 alternatives to a merchant cash advance
The high cost that merchant cash advances require has bankrupted many small businesses. Therefore, it might be worth considering these other alternatives:
1. Business credit cards
According to a recent study by Nav, over 20% of business owners stated business credit cards are one of their top resources when they're in need of financing. Business credit cards are relatively easy to qualify for, and many have a 0% introductory interest rate that lasts for the first full year of use. Even if you secure a business credit card with a 15% APR, it can be better for you financially than obtaining an MCA.
Business credit cards can help you to separate your personal and business expenditures. You can track what you're spending at the business, and this makes a lot of sense when tax season hits. Record-keeping is streamlined, and itemizing deductions is much easier. And because most banks and credit card issuers offer exportable statements, turning your records over to a tax professional is simple.
2. Vendor credit
Vendor credit is also known as a trade or supplier credit. Vendor credits are payment terms offered by your suppliers that allow you to pay the balance of your order within 30, 60, or 90 days, depending on the terms of your agreement. Getting these kinds of arrangements in place with your vendors not only helps your current cash flow situation, but if your vendors report your payments to the major business credit bureaus, such as Dun & Bradstreet, you're also building business credit.
Vendors like Uline and Quill are the perfect place to begin a vendor line of credit. After you create an account, place an order and request net-30 billing – if you're approved and make payments on time, this can help build your business credit and can safely get you through a cash flow crunch.
3. Small business line of credit
While it can be difficult to qualify for a business line of credit, you can turn to online lending institutions that may have easier qualification requirements. That said, if you do secure a small business line of credit, make sure you understand your payment terms. Sometimes the costs of small business credit lines can add up, too.
Securing this type of loan might seem like the answer to your cash flow issues, but certain drawbacks could cause your cash flow to disappear altogether. While the introductory interest fee might be low, you could be paying more in fees than you'd expected. Plus, small business lines of credit are normally quite nominal. Only use this type of solution if you're certain you can repay what you borrow against.
Getting an MCA isn't the only option if you face a short-term cash flow crunch. There are other options available and most aren’t only more affordable than MCAs, but also have longer payback terms.
No matter which option you choose – a business credit card, a vendor credit, or a small business credit line – make sure you understand the criteria and other requirements for approval, as well as how your decision will affect the business in the long term.