Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Oct 24, 2012

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A merchant cash advance is essentially a payday loan for a business. These are relatively new forms of financing, somewhat similar to online payday financing.

Questions about payday loans usually pertain to individual borrowers and not businesses who obtain a quick cash advance. However, there are stark similarities between the two forms of financing.

Just as payday financing is meant for borrowers with poor credit scores, merchant cash advances are meant for businesses with little to no credit histories. These businesses lack reputable credit histories gained from purchasing inventory, factories, offices, and warehouses over the years—as established offline conventional businesses typically have. Most of these businesses are small online operations that do not require extensive amounts of money, which makes them perfect customers for the modest sums offered by merchant lenders.

Both payday financing and merchant cash advances are lent with relatively high interest. This is due to the risk that lenders take on by giving money to people or businesses with little to no credit history. By charging high interest, lenders ensure they will receive a profit from a risky lending practice. In the event that borrowers fail to repay, the lender will have hopefully recouped the lent money due to the high interest rate.

These two forms of financing do differ in their respective repayment policies. While payday financing must be repaid in full at the end of the loans’ lifetimes, merchant cash advances can be repaid in installments. In fact, some merchant borrowers repay their debt by paying a fraction of each sale to their lender.

Unlike payday loans, which are essentially available to anyone and everyone, merchant financing requires a business in place as well as evidence of business operations, such as sales.

While online and offline payday loans have been around for quite some time, merchant lending is a relatively new form of financing that is being pioneered by tech startups and ecommerce giants like Amazon.