QuickBooks Alternatives: 5 Best Options for Small Businesses in 2022…
Merchant Cash Advance
Are you in need of urgent funding? merchant cash advances could be right for your business. This article is going to talk to you about what a merchant cash advance is, if it’s a good deal or not, and what that cash REALLY costs you.
With merchant cash advances, a lender is advancing you cash against future receivables, and deposit it directly into your business account. Typically, business owners can get a merchant cash advance in literally 24 hours.
Here’s what you’ll learn in this article
- How merchant cash advances work
- The cost of a merchant cash advance
- Why borrowers choose to get one
- Reasons you should be careful
- Alternatives to MCA’s
Pro’s of Merchant Cash Advances
- Straightforward approvals
- Quick access to cash
- Bad credit friendly
- Great for virtually all businesses
Con’s of Merchant Cash Advances
- Higher cost than traditional business funding options
- Repaying it can reduce your daily cash flow
How do merchant cash advances work
Merchant cash advances have historically been for businesses whose revenue come from credit card sales and debit card sales. Merchant cash advances are available to other businesses that don’t rely heavily on credit card sales as well. merchant cash advance lenders say their product isn’t technically a loan. These funding instruments can be structured in two ways.
- You can get an upfront sum of cash for a slice of the future sales. You can also get upfront cash that is repaid by remitting daily/weekly debits from your bank account.
Instead of making one fixed payment every month from a bank account, with a merchant cash advance you make daily or weekly payments, plus fees, until it’s repaid.
How much you pay in fees is determined by your ability to pay the merchant cash advance. Typically, lenders charge a factor rate – ranging from 1.2 to 1.5 based on its risk assessment of you. The higher the factor rate, the higher the fee you pay. Typically, to calculate your payback you multiply your funded amount by the factor rate.
Percent of credit card sales
The merchant cash advance provider automatically deducts a % of your future credit card sales until the agreed upon amount has been repaid in full. The repayment period usually ranges from 3 to 12 months. The higher your credit card sales, the faster you can repay the merchant cash advance.
For example, say the merchant cash advance provider is deducting 10% of your monthly credit card sales. They will continue to do this until you’ve repaid the $70,000. If your restaurant averages $100,000 in revenue per month, you’d repay $10,000 monthly. This means a daily payment of $333. At this rate, you’d pay off the advance in 7 months. If your revenue dropped to $70,000 per month, you wouldn’t repay the merchant cash advance until the 10th month.
Fixed daily withdrawals
This kind of merchant cash advance agreement has a daily or weekly payment to be withdrawn.
Why do borrowers choose for a merchant cash advance?
Although merchant cash advances an option of last resort, they do have some benefits.
- They are quick. Often, you can get an MCA within 24 hours, with little to no paperwork. Provides will look at your credit card receipts to determine if you can repay it.
- You won’t lose your home. MCA’s are unsecured financial instruments, so you don’t need to provide collateral. It means you don’t have to forfeit any personal or business assets. If the company goes out of business, you don’t need to worry about paying it off.
- When sales are down, you payment goes down too. When your repayment schedule is a % of your daily credit card sales, the repayment is adjusted based on how well or poorly your business is doing.
Reasons to be wary about merchant cash advances
- Your APR can be in the triple digits. The annual APR, the borrowing cost, with fees and interested included, ranges from 40% to 350% depending on who you’re borrowing from. This is more expensive than traditional business loans, where the APR is 10% or less. Business credit cards usually have an APR from 12% to 30%.
- There’s no early repayment benefit. Since you must pay a fixed amount, you get no savings from early repayment.
- No federal oversight. The MCA industry isn’t subject to federal regulations because MCAs are structured as transactions, not loans. They are regulated by the Uniform Commercial Code in each state, not banking laws.
Merchant cash advances are a popular go-to solution
The speed come with a huge price. In this article, we’ll break down everything you must know about a merchant cash advance. These financial loans are a type of business cash advance against your future revenue. You get a lump sum amount of cash, which you then pay back with a % of your daily sa.es The merchant cash advance is designed to help your business with short term financing needs – that need to be funded FAST. They are less stringent than traditional loan, and are a common option for newer businesses.
How does a business cash advance work?
You apply for it online, and in a matter of minutes get approved. You get a lump sum of cash, in exchange for a portion of your future credit card receipts. This repayment begins almost immediately after you take the money. The typical advance is between $3000 and $300,000. Depending on how much you borrow, the repayment period can be as little as 120 days, or as long as 24 months. The average term of a merchant cash advance is 8 to 9 months. The merchant cash advance lender determines how much you’ll need to pay back by looking at your monthly credit card sales. Other factors a lender looks at, is time in business, your industry, and other factors.
Typically, you can figure out what you’ll owe by multiplying your loan amount by the factor rate. For example, if you get $40,000 – your total repayment would range from $44,000 to $60,000. The % of your daily credit card sales that a merchant cash advance lender takes is called the holdback. This range from 8% to 30%. The provider takes a predetermined % of your daily sales directly out of your account until the entire principal and interest is paid back.
Merchant cash advance terms
Factor Rate: This helps you understand how much you will pay back
Holdback Rate: % of your daily sales that the lender will take until you pay back what you borrowed.
Pro’s and Cons of Merchant Cash Advances
Here are some benefits of an MCA.
Pro #1: Quick
When you need capital fast, a merchant cash advance can deliver the funds you need. You can be approved in literally a few hours, and have the funds in your bank account.
Pro #2: Easy to Qualify
With most lenders, you need a credit score over 700. MCA providers tend to be concerned with your daily sales and credit card processing volume. This means even credit scores as low as 500 can be eligible for financing.
Pro #3: No Collateral
Some types of financing require a business owner to offer collateral. This can be land, equipment, or other assets. Merchant cash advances are unsecured, which means no collateral needed. Some MCA provides will require a personal guarantee, which means your business, and perhaps personal, belongings are at risk.
Pro #4: Flexible Payment
You pay based on how much you’re generating in revenue. If your revenue goes down, the % repayment goes down. If your revenue goes up, the % repayment goes up.
Pro #5: High Borrowing Limits
merchant cash advance lenders lend you up to 250% of your credit card sales. If you can prove consistent sales, chances are you’ll qualify for a larger merchant cash advance.
Many business owners are under the impression that a merchant cash advance is a loan. However, it is not a loan. It is a unique cash advance that is based upon the total amount of credit card sales deposited within the business owner’s commercial account.
Merchant cash advances continue to grow in popularity because a business owner can have capital deposited into their checking account within one day or several days after being approved. This is a better option when you consider that it could take 30 to 90 days for a conventional loan to be approved by a bank.
The MCA lender uses a different approach when they evaluate the prospective borrower’s capability to repay the loan. They review daily credit card receipts to see if the prospective borrower will be able to honor the repayment terms associated with the advance. However, it’s imperative to point out that the rates for a merchant cash advance can be pretty high. It’s important for you to make sure that you understand the terms, so that you can make the right decision for your business.
What is a Holdback?
It’s not unusual for business owners to be perplexed when they hear this term, or see it written in the MCA paperwork. A holdback is the percentage of daily credit card sales applied to your advance. The holdback percentage can range from ten percent to twenty percent. The holdback rate does not fluctuate. It’s fixed until the advance is paid off.
If your business does numerous credit card transactions daily, you will be able to pay off the advance in a shorter period of time. If credit card transactions are unexpectedly low for a particular day, the draw from the merchant account will be lowered. In short, incoming credit card receipts will have an impact on the payback.
What’s the Difference between the Holdback Amount and Interest Rate?
There’s a distinct difference between the holdback amount and the interest rate attached to the advance. It’s not unusual for many MCA suppliers to charge a factor rate. The factor rate is not amortized during the advance.
The factor rate for an MCA can be double digit figure or a triple digit figure. The provider sets the terms for the rate.
Is a Merchant Cash Advance Ideal for Your Business?
It’s not a pleasant feeling when your business does not have enough capital to seize a promising opportunity that can generate impressive revenue. An MCA is a unique way of getting quick cash for your business, but there are some things that you should consider before seeking one. For instance, can your business afford to deal with the costs associated with a merchant cash advance?
A MCA may appear to be more attractive since less paperwork is involved, and you will not have to deal with the strict requirements laid forth by traditional small business lenders. However, a merchant cash advance can be expensive. It’s also vital to point out that an MCA will not improve your company’s credit profile. Despite these cons, many small business owners are able to use a merchant cash advance to their favor.
Are There Other Financing Alternatives?
There are other short-term financing options for small businesses. Some small business owners apply for short-term loans from small credit unions. If your business has a strong credit profile, you can get a line of credit. With a line of credit at hand, you can use it when you need capital. At the end of the day, a merchant cash advance will always be on the table if you are not interested in dealing with banks or credit unions.
If you’ve been unable to secure a business loan in other ways, such as by going through a traditional bank or a credit union, then consider a merchant cash advance from companies. You shouldn’t think of this kind of advance like a typical loan. Although you’re getting money that you need for your business, the way that the loan is paid back to the company is a bit different. It’s sometimes easier to secure a merchant cash advance, especially if you’ve been in business for some time and you can show that you have sales that are high enough to pay back the loan within the designated time.
This type of loan works in a simple manner if you already accept credit and debit cards as payment from customers. The company that you decide to apply through will usually check your credit and look at how long you’ve been in business. If you’re approved, then you will be given the loan as you would with any other company. Some merchant cash advance companies have a strict policy of when the loan has to be paid back, but there are many that are flexible as long as a minimum payment is made each month. When you get the loan, you can use the money in your business in any way you see fit. When you close your credit and debit card sales at the end of the day, a percentage of the sales is then sent to the merchant as a payment on the loan. This means that you don’t have to worry as much about sending a lump sum of money to the merchant for the money that you borrowed. As long as you have customers in the store and your customers use a card to make a payment, then you will be able to pay back the loan with ease.
A merchant advance is often an easy way to secure a loan and easier to pay back than other types of loans since you really don’t even have to think about submitting a payment. However, if you don’t have many customers during the day or you don’t have customers who use cards as a payment option, then you might have to contact the merchant to set up another kind of payment for that day. There usually isn’t a collateral requirement, which is beneficial if you are just getting started in your business and need a loan to pay the fees to get your company up and running. This type of loan is also beneficial if you don’t have a good credit score as this is sometimes not looked at as much as your income for your business.
There is usually a maximum cash advance that you can get as well as a minimum. The maximum is usually $250,000. Keep in mind that you need to ensure that you’re going to have enough business to make the payment. If you have a small business or one that people don’t know about yet, then you might want to start with a smaller loan to see how well the process works. In most situations, you can apply for another loan in the future or add on to the amount that you already have after paying back a certain amount. The merchant is looking for you to show that you have enough sales to make the payment and that you can get the loan paid back within the designated time, which for most companies is 18 months to two years. It usually takes only a few days for you to get approved and receive your money from a merchant cash advance.