Not all business owners are familiar with what a merchant cash advance is or how to use it, but now more than ever it can be a useful alternative to the traditional loan situation. Credit is tight these days and it takes a long time to process a small business loan, so what can you do if you’re a business owner with an immediate need?

Although only a decade old, the cash advance industry was designed just for you. This option involves a company buying up your debt. For the traditional merchant cash advance you don’t need to have collateral or even good credit, and this is why it’s often a popular choice among business owners in an emergency situation. It’s much more hassle-free and straightforward than putting together a business plan and pitching a strategy to a tight-lipped and tightfisted bank representative. Some companies can even get the money to you as quickly as seven days after you put in your request. Choosing this alternative has saved more than one company from disaster.

However, just like most quick cash advances, this route should be approached judiciously. It’s essentially the business version of a payday advance; a merchant cash advance typically carries interest rates of 30% or more if you’re lucky. Some companies even set their rates as high as 60% to 200% APR. Since there is no official regulation in this industry as of yet, interest rates can vary wildly across the board and business owners who choose to take out a cash advance need to be very sure that this is their only option before going ahead with the transaction. It helps to consider the advance as a loan with a very high fixed interest rate, and act accordingly.  

Technically, however, this isn’t a true loan. The merchant cash advance industry takes great pains to avoid the “loan” label and instead describes their services as the “purchase of future income.” Essentially what you are doing when you take out an advance of this nature is garnering your wages. It’s akin to a long-term mortgage for a house; you get a lot more interest than you would have had with a government or bank business loan, but you can arrange smaller payments for a more long-term, manageable type of debt.

To some business owners this is preferable to dealing with losing their company and the problems that come with bankruptcy. A merchant cash advance keeps you in debt longer, but gives you a little breathing room in which to save your business—and this can be more cost-effective than raising capital for a new startup after having ruined your credit through bankruptcy.

Despite lack of regulatory considerations within the cash advance industry, most merchant cash advance companies follow a consistent pattern unless you arrange some type of agreement as referred to above. They focus on the merchant’s credit card sales, siphoning off a portion of these transactions until the required amount is met, usually in less than 12 months.

This strategy can either be a relief or a pain, depending on individual situations; for some it is a welcome change because the cash advance company has no due date and no fixed payments. For others it is irritating to have their wages essentially garnered and have a fluctuating amount taken out each time.

Either way, choosing a good merchant cash advance company is crucial if you decide to go this route. Good companies understand that it is not in their best interests to suck a merchant dry all at once and will adjust their rates accordingly. Their retrieval rates depend on the merchant’s profit margins, and can go as low as 1% so that the merchant can sustain payment levels. After all, if the merchant goes bankrupt, the cash advance company will never receive its payments.

Finding a good company from which to get a cash advance is fairly simple; it’s best to go with customer referrals or well-established, trusted names. Some merchant cash advance companies are completely irresponsible and untrustworthy, which ruins the industry name for everyone. But if you have decided that there is no other way and have selected a good company to work with, it might just be the case that a merchant cash advance will be good for you and your business.