New Jersey Merchant Cash Advances
Most businesses often fall into cash flow problems because they need to pay bills on time even when their clients have not paid on time. As such, most of the businesses affected by cash flow problems offer credit to their clients. The business may have successful sales, but the customer does not pay immediately. This forces the firm to look for sources of cash to pay current bills as they wait on their customers to pay. Many financing options are available to such companies with the common ones being bank loans, overdrafts, business credit cards, and merchant cash advances.
For the sake of this article, we are going to focus on merchant cash advances. A merchant cash advance is a loan that is usually available to a business that sells to its clients using credit cards. A merchant cash advance, therefore, can be defined as a cash advance given to the firm based on its credit card sales.
The merchant pays a percentage to the lender from the daily proceeds of the merchant accounts. What are the benefits of merchant cash advances?
1. Easy application process
The application process for a merchant cash advance is straightforward. The lender first evaluates the borrower’s credit sales report of the last few months, usually two to six months. The average monthly credit card sales are then used to determine how much the business qualifies for. The process can also be done online by applying online and uploading the necessary documents.
2. Fast turnaround time
One of the critical benefits of MCA is the quick turnaround time. The approval process is usually fast because the lender only considers the average monthly credit card sales amongst a few other details. MCA are typically processed within a few hours and the money deposited as soon as the approval process is over.
3. The credit score isn’t factored
Because these loans are based on average monthly credit sales, the borrower’s credit score is not considered. This helps many businesses with low credit score secure loans that they could not have accessed traditionally.
4. No collateral
In merchant cash advances, there is no requirement for a guarantee. This enables many businesses without collateral and assets to obtain financing.
5. Flexible payment
The amount payable each month depends on credit card sales. This helps the business because the amount repayable is only a fraction of the monthly sales and not a fixed amount.
6. High limits
MCA usually offers clients more than they can qualify for in a traditional loan setting. This helps the business to access more finances.
Who can qualify for a merchant cash advance?
Usually, most business can qualify for these types of loans as long as they have credit cards sales and have been in business for a reasonable amount of time. MCA is usually good for new businesses that do not have a good credit history and can’t qualify for traditional loan programs.
MCA does not attract APR; instead, their interest is known as a factor rate. The rate is a decimal figure that represents what the business will repay the lender. Most common factor rates range from 1.1 to 1.5. To get the amount which will be repaid, you multiply the factor rate with the money borrowed.
The factor rates should not be confused with interest rates because they are very different. Factor rates may seem low, but they are usually very high when you compare them with prevailing market interest rates.
What are the available alternatives to merchant cash advances?
A business that does not want to acquire a MCA but still is looking for financing option can explore other avenues. These avenues include business credit cards and term loans among others.
A holdback is a fixed percentage of the daily credit card sales that a MCA holder remits. These monies are used to repay the loan and range from 5 to 20 percent of the daily sales. The difference between a factor rate and a holdback is that the factor rate is the interest rate while a holdback is the percentage of daily sales repayable to the lender.
Although they are expensive, merchant cash advances are good for businesses that need fast cash and cannot access other forms of lending.