Merchant Cash Advance – What You Should Know
If you’re a business owner, you may be interested in learning about merchant cash advances and how they may be helpful for your situation. A merchant cash advance provides a rapid way for you to receive cash advances on your credit card receipts.
Although they aren’t loans, you must submit an application and meet basic qualification requirements in order to get approved for a merchant cash advance. Quite simply, the provider will review your past credit card receipts to determine your merchant cash advance amount.
One of the most attractive features of a merchant cash advance is the length of time it takes to get an approval decision. In many instances, business owners can receive a loan decision and have cash deposited into their accounts within 24 hours.
Several factors are taken into account when merchant cash advance providers review your application. The most important factor is your daily credit card receipts. They’ll review them to determine if your business generates enough income to repay the advance.
Merchant cash advance applications are evaluated differently than traditional loan applications. Another thing you should know is merchant cash advances have higher rates than traditional loans. Before you agree to a merchant cash advance, you should understand its terms and guidelines.
Merchant Cash Advance Holdback – What Is It?
A merchant cash advance holdback is one of the least familiar terms for customers. A holdback is the percentage of your daily credit card receipts. This amount is automatically taken out by your merchant cash advance provider.
The amount of the merchant cash advance holdback varies depending on the lender. However, lenders typically withhold from 10 to 20 percent of daily credit card sales to apply toward your loan balance.
Here’s an example of how a merchant cash advance holdback of 10 percent would be calculated. If your daily credit card charge on Monday was $500, the merchant will withhold $50 of the credit card receipts.
Depending on your credit card receipt revenue, the amount of your holdback can fluctuate. If your company has a lot of credit card sales, you’ll be able to repay the advance quickly.
Merchant account holdbacks eliminate the need for a provider to require collateral to secure the advance. Since your merchant will have access to your credit card receipts, you won’t have to forward your holdback amounts to your merchant cash advance provider.
There are additional factors that determine the holdback rate. This includes the total amount of the merchant cash advance, the amount of time to repay the advance and the amount of the monthly receivables.
What’s the Difference Between Interest Rates and Holdback Charges?
Typically, merchant cash advance providers charge factor rates. Unlike interest rates, factor rates aren’t amortized over the duration of the advance.
Factor rates are higher than loans from banks and other lending institution. The factor rate amount depends on the provider. Some lenders charge up to triple-digit factor rates.
When you repay the loan, you’ll be required to pay holdback charges and factor rates. You should keep this in mind when you sign a merchant cash advance agreement.
How to Determine If a Merchant Cash Advance is Right for Your Business
A merchant cash advance works best for businesses that require short-term funding solutions. It’s essential that you determine if this type of advance fits your budget.
You should determine whether your business has the income to support a merchant advance. If your business is experiencing a financial problem due to diminished sales, this may not be the best option for you. You may find that applying for a short-term business loan is a better option.