Starting a business nowadays is quite a daunting task. Considering the state of the market since the great financial bubble burst of the late 2000s, any young entrepreneur is met with the intimidating challenge of raising viable funds for their ventures. In this era of financial uncertainty and less-than-readily available bank credit, an age-old industry has resurfaced as the champion of funding for entrepreneurs: the merchant cash advance providers, also known as business cash providers.

Furthermore, obtaining funds from a traditional lender when you have poor credit can be even more difficult, which is why some of these merchant cash advance providers have started branching off into the bad credit business loan arena.

The way this system works is that cash advance providers offer initial funds to the entrepreneurs on an unsecured lump sum basis in exchange for a certain share of their future credit and/or debit card sales along with a premium. Although it is quite a risk on the part of the lender, as a failure of the business means that the lenders investment goes down the drain, it does provide a healthy incentive for entrepreneurs to make sure that they grow. Essentially, you can boost your business with easy finance. The faster they cross the break-even threshold and reach self-sustaining levels of growth, the sooner they can start paying off the cash providers without those transactions affecting the business in any adverse way.

However, cash providers do not just invest blindly; they usually target those in the retail, restaurant and other service sectors who show potential and have good prior credit-card sales records. For whatever reasons, whether it is low to no collateral or not meeting stringent bank credit criteria, many in these industries cannot obtain access to the funds they require from banks. This is where cash providers come in, they provide easy access to cash. However, this should not be treated like a loan, but more like a purchase order of future income.

The thing that entrepreneurs should keep in mind is to take into account whether accepting cash from an advance provider is better for them in the long run as compared to a bank loan. However, since not all entrepreneurs are immediately qualified for traditional bank loans, as already discussed, this leaves them with no choice. Considering the current recovering state of several economies, this has led to many entrepreneurs facing closed doors at banks and thus having to resort to business cash advance companies.

Since the advance cash is not specifically a loan and is not regulated by the relevant authorities as such, it provides these companies with more room for negotiation as well as flexibility. As there is not fixed payment schedule, they can adjust the payment plan for the entrepreneurs; this can be a double-edged sword. Due to this most entrepreneurs would strive to pay off the actual principle and the premium charged as soon as possible.

There are generally three different repayment methods for the business:

  • The credit card processing company divides the proceeds from a sale automatically upon processing the transaction. The division is based upon the agreement between the business and the cash advance company.
  • All the credit card and/or debit card sales (as per agreement) of the entrepreneur’s business are deposited automatically into an account controlled by the lending company. The company then sends the entrepreneur’s share themselves.
  • The finance company receives access to the business’s accounts and the credit card processing information and deducts its agreed upon portion by itself from the business’s checking account.

While this method of raising capital to set up a business seems quite enticing to young entrepreneurs, like any other financial activity, it should be followed through with extreme caution, after having reviewed the cash advance company thoroughly and checking with the Better Business Bureau (BBB).