Is A Merchant Cash Advance A Good Source Of Financing For You?
Business loans are what business owners will turn to when they need financing to grow their business, but they aren’t the only financing option out there. Usually they’ree the most trusted financial option because they’re well regulated and usually can come with flexible repayment terms depending on what kind business owners qualify for. Unfortunately, some businesses simply don’t qualify for loans because they haven’t been around long enough or they just can’t find a bank whose loans offered match what they’re qualified for. But that’s where business owners may want to look into alternative options like merchant cash advances which can be easier to get than loans.
The Basics Of A Merchant Cash Advance
A merchant cash advance does have one similarity to a business loan in that there is a lender who will offer you a certain amount of funds that will usually be deposited in your business checking account, and you can use those funds for any purchase for your business. The funds will be paid back to the lender, but this is where merchant cash advances and loans differ considerably. A merchant cash advance is not repaid by you by paying a monthly amount till the end of the loan term to repay the loan plus interest. Instead, what the lender has actually done is made a purchase of future credit card sales, so what happens is each time your business makes a sale by credit card transaction, the merchant cash advance provider will collect a percentage of that sale to apply to the amount due on the advance. There are usually no due dates on when the advance has to be repaid; you just finish whenever your credit card sales have paid it off.
Merchant Cash Advances Are Not Factored Invoices
Another form of financing that although somewhat similar to a merchant cash advance but still quite different is invoice factoring. What invoice factoring does is purchase accounts receivable invoices similar to how a merchant cash advance does future credit card sales, except the purchase amount with invoice factoring is final and businesses do not repay the lump sum purchase to the factoring company. Basically, invoice factoring is purchasing existing customer bills that just haven’t been paid yet. Merchant cash advances are based on projections and are assuming that credit card sales will be high enough to pay back the advanced amount in a fairly timely manner.
Risks Involved With Merchant Cash Advances
Merchant cash advances are generally very easy to qualify for and you can get your funds quickly, but there are some risks. One risk is that the final amount you pay back is calculated by a factor rate instead of an interest rate, which while different advances will have different factor rates, the problem is they do not amortize like loans. Sometimes you will end up paying more back to the merchant cash advance provider than you would a bank. Another thing you should be aware of is that the percentage rates of credit card sales that get collected by the provider could be high and you may find your future cash flow decreasing because of it. Generally, contracts that come with merchant cash advances forbid borrowers from trying to encourage customers to pay with cash or alternatives to credit or debit cards, and doing so could trigger a default. Also, paying off merchant cash advances will not improve either your business credit or personal credit because it will not be reported to any credit bureaus.
The bottom line is merchant cash advances certainly can be reliable for some businesses who have constant credit card sales and who may find them easier to work with than bank loans. On the other hand, other businesses are not too well suited to handle the risks that could come if their credit card sales were to slow down. It’s important if you go with a merchant cash advance that you know all the small print and read it thoroughly before submitting any signatures on the contract.
When a lender gives you a merchant cash advance, they’re giving you an advance based on your credit card sales. Learn more about how cash advances work by reading this article. You can also learn more about how merchant cash advances work, as well as some alternatives to this funding method.
What Exactly Is A Merchant Cash Advance?
This funding method isn’t a loan so much as it is a type of cash advance. The amount that you receive from a merchant cash advance will depend on your credit card sales in your business bank account. Once you apply for a merchant cash advance, you can get the funds deposited in your bank account within a day or two. In most cases, you can get your business funds within 24 hours.
MCA lenders see credit criteria and risk differently than most cash providers. For example, they will look at the number of credit card receipts in your account. They do this so that they can determine whether you can pay back the advance on time. Due to this difference, the rates of a merchant cash advance can be a lot higher than other types of funding. For this reason, you should always look at the terms of an MCA to make sure that you can pay back the funding according to the provider’s rules.
What Exactly Is A Holdback?
Many business owners don’t know the definition of a holdback and how it applies to them. The amount of a holdback operates as a percentage of your business’ credit card sales that then gets put on your advance. Most merchants’ holdback percentage tends to be between 10 and 20 percent. Lenders make this a fixed percentage until the merchant repays the money.
Due to the fact that the amount you repay will be based on the percentage of your account’s daily balance, you might be able to pay back the advance a lot faster. How fast you pay back the advance will depend on the amount of credit card sales that you receive. If your transactions turn out to be lower than expected, then a lower amount of money will get drawn from your merchant account.
What’s The Difference Between An Interest Rate And A Holdback Amount?
Some merchants don’t realize that there is a big difference between an interest rate and a holdback amount. Many MCA lenders charge something called a factor rate. The factor rate doesn’t get amortized at any time during the repayment term. This is one thing that makes the factor rate different from a traditional loan. For most merchants, the factor rate can be anywhere from double to triple digits. The exact factor rate that you will pay will depend on the lender that you choose.
Should You Take Out a Merchant Cash Advance?
In some circumstances, taking out a merchant cash advance could make financial sense. But before you sign any contract, you will need to make sure that the cash advance terms are palatable to your situation. Due to the fact that the qualifying terms of many MCA providers are lower than those of traditional lenders, there is a high cost of taking out an MCA. But many business owners successfully use MCAs to fund different aspects of their business.
What About the Alternatives to a Merchant Cash Advance?
Some business owners decide that a short term loan can meet their financial needs. Other merchants that have a high credit score have found that business lines of credit can help them run their operation with positive cash flow. To pick the solution that’s best for your business, compare terms, interest rates, and other factors that determine the amount you will pay back over time.