As an entrepreneur, you need capital now. A merchant cash advance is a quick source of capital for your business. It is different than a loan because it is based entirely on your credit card history. You only pay back a percentage of your sales as you earn them.
How Does It Work?
This funding technique works best for companies that gain revenue from credit card and debit card sales. Because of this, they are often used by retail centers and restaurants. It is not a loan because it is merely pre-paying you for your future sales. You get an upfront, lump sum determined by what you will make in the future.
After getting the advance, you have to pay back a percentage of what you make in credit card transactions. Known as the retrieval rate, this percentage is generally 5 to 20 percent of the sales. You never have to make a fixed payment each month. Instead, you pay back a percentage until the advance is totally paid off.
The fees are set according to your ability to pay back the merchant. The factor rate is typically around 1.2 to 1.5 according to your company’s risk. A higher factor rate means you pay higher fees. An advance of $50,000 with a factor rate of 1.4 would cost $70,000 to pay back.
Payments Are Determined According to Your Sales
With a term loan, you have to set aside a fixed payment each month. A merchant cash advance is different. The business pays a percentage of the credit card sales they bring in each month. The provider automatically deducts this percentage from your sales until the advance is paid back. The repayment period can take from 90 days to 24 months depending on how much you borrow and how much you sell.
This funding technique works well if you are pressed for cash. A loan can take days or weeks to apply for. Even when you have turned in all the paperwork, it can take even more time to approve the loan and get you the money. A merchant cash advance is much faster. You get approved within the first day. Then, you get the money within just two days or less.
With a merchant cash advance, you never need to have collateral. The funding is set according to your sales. You do not have to risk your assets as collateral or use personal assets for your business. You can also get this funding if you have poor credit. The main thing that matters is your sales history.
Why Do People Choose a Merchant Cash Advance?
Many people choose this funding option because they are fast. You do not have to do in-depth, onerous paperwork. Since a merchant cash advance is unsecured, you do not have to use collateral. This means that you will not lose your home if you cannot pay it back. When your sales are down, you do not have to pay back a high fixed payment. You only pay back a percent instead of a set amount.
Like any type of loan or advance, there are drawbacks to this kind of funding. The contracts can be confusing, so it is important to go for a provider you trust and who has a straightforward process. Depending on how long you take to pay back the money, your functional APR could be much higher than a normal bank loan. If your sales drop, it will take you longer to pay back the money. No matter how long it takes you to repay the money, the amount you pay is still the same because the advance uses a factor rate instead of an APR.
Before you get an advance, do your research. Make sure that you will be able to comfortably repay the money. You also want to read through the contract and check the factor rate to see if you are getting a good deal. If the numbers work out, then this could be a good choice for your business.