I'm planning to run a campaign where the players are hired by a seedy merchant's guild to explore a far away land because of rumours of treasure and resources. I thought I could make a time limit where they have to return before a certain time or else they'll be declared missing or dead. Is that a good or bad idea? BTW it'll be a sandboxy kinda West Marches style campaign with an underlying story. The players will have to find clues and put the pieces together to get the bigger picture, as well as getting treasure for the merchants.

It's an idea! The good/bad will be decided in the execution. Good = "Everyone has more fun because of this!"

I think it's a great fit for the West Marches approach. The characters get to go on an adventure but know that they'll have to get "home" before too long. I'd just make sure they clearly understand that vs. surprising them with it when they return.

I'm a pretty big fan of consequences in a D&D campaign. Whatever plot threads the characters chase are decided by their actions and success, anything they ignore gets resolved by me to advance the stories and feel of the world being real in its own context.

Deadlines are a great motivator and pretty common part of adventuring quests, whether arbitrary ("you have 3 days to do this") or organic ("you must get to the castle before the enemy can invade"). Consequences for failure can be anything from losing out on pay, to enabling the baddies' plans, and really anything in-between. As was said already, it's best if you explain or hint the stakes and consequences of the timeline before it's too late so that your players don't feel cheated. 

Why would they care if they are declared missing or dead? What’s the down side there? And when they show up in town, won’t they just be able to say, “hey, we’re alive.”

Yeah, I was thinking it isn't a great way to enforce a time limit. But maybe it could create a conflict on whether they should just head home and get the money, or stay and solve the mystery/save the kingdom/get the mcguffin (this campaign could involve all three, depending on what they do in the campaign). I might make a more organic time limit like another user said.

Edit: oh yeah also, how long do you guys think the PCs should have to explore before going home?

Yeah, time limits usually work best, imo, as part of the villain’s plan. They’re doing the ritual at the next full moon. They’ll break out of their prison in three weeks. That kind of thing. 
Combining that with a west marches can work, you just need to let the party figure it out in time to stop it — or not — but give them enough time so it’s a choice. 
As far as how long, I’d usually base it on travel time. How long will it take to get to wherever it is the thing is happening? Then give them maybe 2-3 days more than that. Enough so a little side quest you throw at them along the way looks appealing, if they hurry. But it should still be a tough choice.
The biggest thing is, make it meaningful. Let them have multiple things they can do, but once they choose one, that closes off other choices. Don’t make it a video game where the quest giver says “ you need to hurry” but really, they’ll stand there waiting for weeks while you roam the map. Make the world move on without them.  That’s how you make it feel lived in, and that’s extra important to do in a west marches style. 

Think about why there would be a time limit. Will they get more coin if they can do it quicker? Will something dangerous happen if they don't? 

My players work for a guild, and all their contracts have time limits. If they don't complete the quest and return to HQ by the deadline, they don't get paid. Pretty cut and dry.

In my previous campaign, my players were trying to stop a mage from summoning some titans. They learned through exploration and research that the demiplane the titans were imprisoned in would be vulnerable on the night of a specific lunar eclipse, so that was the most likely date of the summoning ritual. Thus, they had to defeat the mage or steal her ritual components by that date. If they failed, they'd have to deal with cataclysmic monsters roaming free and destroying the world. In this case, they didn't know the deadline when they began the adventure, but the stakes were increasingly made clear and the urgency mounted as the campaign went on.

What you have to consider is twofold: 1) Why is there a deadline? 2) What happens if the party doesn't meet it? Can they negotiate or fix things even after they fail? How and to what extent do their choices affect the game world? 

As for exploration time...there's no right answer for this. Players will explore when they want to, when they feel they have to, or if they feel they have time for it. They might abandon a quest entirely if something intrigues them, or they might skip exploring for fun if they are on-mission and want to keep going. If you want them to explore, maybe give them a bit more time on their deadline. If you don't, contrive scenarios to spur them to stick to the task.

Time limits are often fun and useful for getting the party to keep moving rather than taking too many rests.

However, in this case the motivations and time limits are too vague to actually be useful. There is also the issue of rewards. If the merchants don't offer them a sufficiently valuable reward why would they go back?

Think about it this way. The merchants offer the party 100gp each to explore the new land and return with information on settlements and trade within 4 weeks. The party goes off to the new land, going on several adventures each week learning about the land, getting the information for the merchants. They reach level 5 and each adventure or tomb they investigate is earning them hundreds of gold (or more) along with magic items. The 500gp reward at level one (for a party of 5) that sounded ridiculously high is now somewhat insignificant. They earn more in a week in the new land doing the West Marches adventures that it isn't even worth their time going back to tell the merchants what they found.

So although time limits can be a good mechanic, I think you would need to come up with a bit of a different basis to make it useful and meaningful in this context.

Maybe I should downplay the merchants time limit. Or maybe the party only starts uncovering the mystery, but then they have to go back to the merchants. The party gives them some treasure and tell them about the region, they get gold, the guild realises there is much more to be found there and send the party back with better gear and some NPCs to help them fight and establish relationships with the locals. Yes I know that it has colonial undertones. Maybe I could make that a conflict in the story? Anyways I might add a more organic time limit involving the BBEG. The good thing about going away and coming back to the region is seeing how their actions have affected it. They are the first outsiders to visit in a very long time after all. Their actions surely would've caused ripple effects.

Well if you’re just trying to get them to come back to the starting city, there’s lots of ways to motivate that. An old friend or family member who lives there needs their help being the first I can think of. 
Another option, and something that work well in west marches, is to give the party a little base. Even if it’s just a small house. Some groups get really invested in building it up and hiring staff (and it gives them something to do with their money). And it’s a place where people can find them. Guilds seeking them for a job, or where characters who aren’t out on a mission can be.