With the growing infusion of investor capital into the small business financing market, business owners are exposed to countless funding companies offering merchant cash advances. And while the funding options these companies offer may appear similar at first glance, they are not all created equally. If you’re considering a merchant cash advance for your small business, determine if the offer you received is too good to be true by asking these essential questions:
Does this cash advance overleverage my business?
A cash advance that overleverages your business can put you at serious risk by forcing you to deteriorate cash flow in order to make excessive payments. To avoid this situation, you must question whether the benefit of an immediate infusion of capital outweighs the risk of decreasing your ability to pay expenses in the future.
For example, if you are producing monthly sales of $50,000, and a cash advance company is offering $100,000 of capital, you should perform a serious analysis to determine if you can afford to accept that sort of offer. Consider the payment term in relation to your revenue, especially when you are offered a reasonably short repayment schedule, such as eight to twelve months.
Am I using this capital to grow my business?
How a cash advance is used can have a direct result on the success, or failure, of a business. Because of their unique repayment terms, merchant cash advances are fast, easy, and flexible. These characteristics make them an excellent choice for projects such as equipment and inventory purchases that will generate revenue, but less desirable for things like debt repayment or payment of operating expenses. Before you accept a cash advance, ask yourself, am I using this capital to grow my business, or am I just using it to put a band aid on a larger cash flow issue? If it’s the latter, you should question the motives of the cash advance funding partner that is offering you the advance.
If the cash advance you’ve being offered by a funding company seems too good to be true, use these questions to determine if it is. Remember, if you decide to pursue a merchant cash advance, make sure that you choose to work with a company that positions themselves as a partner in your businesses.
At Sterling Funding, we make cash advances that help merchants grow their business without overleveraging cash flow. Does this mean that we occasionally cannot match an offer made by an irresponsible funding company? The answer is yes. We believe in building long term relationships with our customers and not just making a profit on a single merchant cash advance which ultimately hurts the merchant.