What is a merchant cash advance?
A cash advance is a lending option for businesses that might not have the time or means to obtain a traditional loan. This is a direct cash advance, usually paid in 24 to 48 hours, based solely upon the company’s credit card sales. Business owners who are short on cash utilize this type of loan to get easy funding based on sales rather than their credit history and the state of the business.
This can be done quicker because the advance lender can easily review credit card receipts to determine the ability of a business to repay its loan in a timely manner. MCA providers also place different weight on credit and risk potential, allowing them to offer a higher approval rating to businesses than a traditional lender or bank. However, the rates and terms of these loans are also going to be different as a result, so it is imperative that you understand exactly what you are getting before you sign anything.
Interest, Fees, and Other Information to Know
Typically, a loan is repaid by the borrower making or setting up payments from their bank account on a structure schedule until the loan has been satisfied. However, since a merchant cash advance is repaid with credit card sales, things work differently. Instead of a loan payment, you will have what is known as “holdback”. This is a percentage of your daily credit card sales, which is determined at the time of your application and approval, that is used to repay your loan. Typical loans require holdback of between 10 and 20 percent of daily credit card sales.
The benefit to this is that repayment is based on your daily balance of credit card sales, which means you may be able to pay it off faster if you have a high volume of credit card transactions. Also, if things are slower on a certain day, the MCA provider will take less money. Essentially, you only pay back a percentage of what you bring in. This makes it nearly impossible to default on repaying a merchant cash advance, which is another great feature.
Interest rates are charged on MCAs. However, it is a factor rate rather than one that is distributed throughout the loan. Every provider is different, so talk to yours about what their interest rates are like and how they are calculated and charged so that you know what you are dealing with before you take the advance.
Is a Cash Advance the Best Choice?
Businesses that are in a tight spot can definitely benefit from a merchant cash advance. It makes sense for short-term, quick financing that your business needs. However, you have to look at the cost of the loan, including the interest you will repay, to make sure that it makes sense for your business. These advances cater to people who need quick money, so they have much less strict requirements for approval but they also come with a much higher price tag than a traditional loan.
If you are in a tight spot, this might indeed be your best option. Be sure to look at all of the options that you have for business capital when you need it to make the right choice. Also, keep in mind that this advance is not a traditional loan and that it is not reported to credit bureaus. That means that it will not improve or assist in building your business credit, so if that is part of your goal you might want to explore other funding options first. However, if you just need quick capital that you can repay on a much easier term, a merchant cash advance might be exactly what you need.
how do you calculate interest on a merchant cash advance?
Before you apply for a merchant cash advance to help you grow your small business, there are a few questions you need to ask yourself. You must also understand what this type of borrowing entails before you sign on the dotted line. A cash advance is not a loan. You do not have years to repay your cash advance. You do not make one monthly payment of a certain amount every month for years. You don’t need great business or personal credit, and you don’t need to have been in business for years, but you do need to know that you can pay interest rates as high as the triple digits. It’s an expensive way to borrow money, but it’s often the best way for some business owners to grow. That’s why you need to ask these questions.
Can You Qualify for a Traditional Loan?
If you can apply for a traditional small business loan and get that, it’s recommended this is the route you take when borrowing. A traditional loan is much more affordable, and it has more benefits than a merchant cash advance. For example, if you can get a loan, you can pay it off early without any penalties and for a lot less. When you have a merchant cash advance, there is no benefit to making a full and early repayment. You still have to pay the full amount of interest on the loan even if you don’t keep the loan longer than a month.
Qualifying for a small business loan requires meeting specific criteria. You must make a certain amount of money in your business. Your personal and business credit scores must both be good or better. Your business cannot be a young business, and even businesses that are a few years old might find it difficult to qualify for a traditional loan. You must have a business plan that the lender agrees will make you more money. If you meet these requirements, it’s better to choose this type of loan than to choose a cash advance.
What’s Your Credit Situation?
If you have good credit both personally and professionally, you will benefit. Even if you have bad credit, you can still secure a merchant cash advance. However, the rate you pay rises when your credit score is low. For example, people with bad credit still qualify for a merchant cash advance, but your interest rate might be in the triple digits. You might qualify for a merchant cash advance, but you might not be able to afford what you qualify for.
Can You Afford to Repay this Loan?
A merchant cash advance can be pricey if your credit score is low. Just because you qualify for this type of borrowing doesn’t mean you should sign up for it. The rate you pay is not like the rate you pay for a traditional loan, but this can work for you in many ways. For example, your rate and your payment are not based on a monthly payment. Your rate and your payment are made daily. You give the lender a percentage of your daily credit and debit card sales to make your repayments. This means your monthly payment for a cash advance if you choose to compare what you pay monthly to a traditional loan, is significantly higher.
On the same note, though, your payment is based on your sales. If you don’t have high sales one day, you’re making a very low payment that day. The purpose of this is to get your loan paid off as quickly as possible. A traditional loan gives you many years to make your repayments. A cash advance is typically repaid in as little as three months or as many as 12 months. It’s not a long-term lending solution.
How Much Do You Need?
Most cash advance lenders will not give you more than $250,000 for your business. If you need more than that, you are not going to find it here. However, they will give you loans anywhere from $2,500 to that point. If you need a small cash advance, you might be able to borrow even with a higher rate and still repay it quickly and in an affordable manner.
If you are going to go the route of a cash advance, you want to borrow only what you need. You do not benefit financially from having additional money in the bank if you don’t need it. Take what you need, pay it back, and don’t borrow more. Use this when you have no other options available, and then move on when you find a better way to borrow. If you can apply for a traditional loan, that is the kind of loan you want to take.
HOW DO YOU CALCULATE HOW MUCH YOU CAN QUALIFY FOR A CASH ADVANCE
Small businesses, especially those that are new, may be short on capital at some point. This is where a cash advance comes in some handily. It is probably the best option you have for quick funding for your small business when you are low on cash or when you want to improve your cash flow on a temporary basis. It’s important to understand what a cash advance is and how it works to determine if it is truly the best option for your small business’ needs.
What is a Merchant Cash Advance?
A merchant cash advance is an amount of money that is extended to a small business meant to provide it with financing on a short term basis. It is a good alternative to traditional business loans because it has less strict requirements and terms and can be acquired even if your business has a short operating history and you have less than perfect credit. A merchant cash advance is a lump sum amount of cash that is provided to a business by a lending company and not a bank or other financial institution like with a regular business loan. It can be a highly convenient option for funding your small business when you need cash quickly, but it is not necessarily appropriate for everyone.
How Does a merchant cash advance Work?
A merchant cash advance is not like a traditional small business loan. Instead of serving as a loan that is required to be paid back within a set period of time and that has a high interest rate, it is essentially an advance payment against the income your business earns in the future. The amount of money you receive from the merchant cash advance is also based on your business’ sales through credit and debit cards. The provider gives you a lump sum amount that is based on your total credit and debit card sales. You pay this amount back automatically through a percentage of your business’ daily credit and debit card sales.
Generally speaking, the percentage that is paid back toward a merchant cash advance is known as the holdback or retrieval rate. The percentage can be anything from as low as five percent to as high as 20 percent depending on the amount you receive in the merchant cash advance. In addition, the terms you receive for paying the money back also vary and can be as short as 90 days to as long as 18 months. The repayment period also starts as soon as you receive the funds.
In determining how much money you receive with your merchant cash advance, the provider takes a look at your receipts from the past three to six months’ worth of receipts. Overall, a merchant cash advance can range anywhere from 50 to 250 percent of your small business’ total credit and debit card transactions.
Who Can Qualify for a merchant cash advance?
Merchant cash advances are good options for the right candidates. In general, if your small business has a short history of being in operations and existence and has little to no collateral, you would qualify for one. Businesses that have a credit score that is bad or poor can also qualify as cash advance providers instead focus on your credit and debit card sales. Eligibility is generally flexible, which makes a cash advance such an attractive option for small businesses that need fast cash.
What are the Advantages of a Cash Advance for Your Small Business?
There are a number of advantages you can enjoy in getting a merchant cash advance to fund your small business. It’s worth knowing what they are if you are considering going this route for fast cash. The following are the most notable benefits:
• You don’t need perfect credit: Providers are willing to give merchant cash advances even if your business doesn’t have good credit. They are generally more flexible than traditional lenders and only concentrate on your credit and debit card sales.
• No collateral necessary: Unlike with a traditional business loan, you are not required to put up any collateral to qualify for a merchant cash advance. This means you can keep your property without worrying it will be seized to pay back the money.
• Fast: Approval for a merchant cash advance is generally fast with very little paperwork. You can also receive the funds within as little as a week.
If your small business is in need of fast collateral and you rely heavily on credit and debit card sales, a merchant cash advance might just be the best option for you. It’s important to do your homework and ensure that it is the right choice for your business funding.
merchant cash advance to the Rescue
This is where a merchant cash advance provider may come in handy. The provider will give the pressure washer the $50,000 cash up front to fulfill this large order by the tech company.
For the $50K cash, the provider will receive back $60,000 total, making a $10,000 profit. The method in which this happens is the unique and interesting thing about this form of financing.
The provider will set it up so that the repayment automatically withdraws from the pressure washers credit card or debit card transactions, thereby, virtually guaranteeing repayment assuming the pressure washer doesn’t go out of business beforehand.
There are different types of repayment options.
This is when a merchant cash advance provider sets it up to automatically get a cut of every credit card or debit card transaction the pressure washer makes.
So when the tech company decides to pay the $100,000 invoice using a credit or debit card, the provider will automatically pull out $20,000. And then as other customers begin to pay using a credit or debit card, the provider may pull out as much as 20% of the sales until that full $60,000 is paid back.
Another repayment option is a trust account. It’s also known as a lock box account.
This is where all of the credit and debit card transactions would be forwarded to a single bank account controlled by the provider. Then the provider would wire out the agreed upon percentage each day.