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merchant cash advance vs bank loan
A merchant cash advance is a way for companies to liquidate their accounts receivable. This can make it easier to hire employees, buy buildings or take other steps needed to grow a business or to stay afloat during lean times. Let’s take a closer look at how you can get such an advance and the potential benefits of doing so.
You’re Selling Your Accounts Receivable
When you obtain a merchant cash advance, you are selling your company’s accounts receivable for cash today. In many cases, customers will ask for 30 to 90 days to make a payment after your business has provided a good or service. For smaller companies, this may result in consistent cash crunches. In some cases, even larger companies may prefer to have a portion of their cash today as opposed to waiting months to receive full payment.
You’re Not Taking Out a Loan
Since you are selling what amounts to an asset the company owns, the transaction is not considered to be a loan. Therefore, there is generally no need to through a formal credit check process. Instead, a factoring company will take a look at your sales figures over the past six months when determining how much to let your company borrow. It may be possible to borrow up to $250,000 or more depending on your recent sales.
The Application Process Is Fast and Easy
The application process generally only takes a few minutes assuming that you have the proper financial information by your side. If you have any questions about the process of obtaining an advance, you can start a live chat or make a phone call to a customer service representative. Furthermore, you can have a loan decision in a matter of minutes or hours. This is idea for when your company needs money quickly to pay a vendor or to make payroll.
What Is the Repayment Process Like?
You repay a merchant cash advance with a percentage of your daily credit card receipts. Generally, you will have 10 percent of your revenue withheld each day until the balance is paid plus any fees charged by the factoring company. You will be told the factor rate for your advance prior to accepting the loan proceeds. The first payment is due the day that you receive the funds.
What If You Can’t Repay Your Advance?
There are many options that may be available if your company is unable to repay its advance. First, it could choose to refinance the advance into a traditional loan and use the money to pay off the factoring company. Alternatively, your company could choose to refuse to pay off the balance and take its chances in court. In some cases, factoring companies will not file a lawsuit in an effort to get its money back. Lawsuits are especially uncommon when a company goes into bankruptcy.
Expect to Have a Long-Term Relationship With a Factoring Company
Usually, you will have a deal to buy accounts receivable that lasts for many months or years. This makes it easier for both sides to benefit financially from the arrangement. In some cases, a factoring company will decide to buy a certain number of accounts receivable or a certain dollar amount of receivables. It is important that you read the factoring contract to determine the exact details of your agreement with an advance provider.
Factoring loans can be powerful tools to help your company succeed. However, it is important that you understand what they are and what your obligations are after entering into a deal to receive one. It may be helpful to have an attorney review the deal to ensure that its terms are in your company’s best interest.