A merchant cash advance is one of the many options a business running low on its financial resources could use to infuse a lump sum of cash to cover a short-term need for capital. It is a convenient financial option in comparison to traditional bank loans that involve lengthy approval processes not to mention strict credit requirements.
Why a merchant cash advance is amazing
- Get virtually same day funding
- Qualify even with poor credit
- Get funded even if your having financial difficulties
- Get funded even if you’ve been in business for only a few months
What is the cost of a merchant cash advance?
- There is no interest rate, there is only a factor rate
- Multiply the funding amount by a factor rate, for example $100,000 X 1.20 factor rate
- Origination fees are usually 2-5% of the funded amount
A merchant cash advance is often mistaken for a loan. In reality, it’s just basically an advance on your business’s future credit card sales. This makes it easier to get funding for for newly established companies or seasonal businesses with less consistent cash flows as payments are based on what one can afford.
How it works
It works similar to short-term business loan. However, unlike bank loans where interest rates are incurred, a merchant cash advance is based on factor rates which normally range from 1.1 to 1.5 or even higher depending on the lender.
What makes a factor rate higher
- If you’ve been in business for a short period of time
- If your business credit is poor
- If your personal credit is poor
- If your revenue has dropped significantly
- If your revenue is erratic
A factor rate is what is used by the lender to calculate your total repayable (loan) cost obtained by multiplying the cash advance by the factor rate. The higher the factor rate, the higher the fees paid. The amount owed is then paid off with holdbacks which generally range from 10%-20% of each sale.
A holdback can simply be defined as the percentage of each credit card transaction. These holdback rates and one’s sales are both what determine how long it takes to complete payment of a particular loan.
High credit card sales qualify businesses easily for a merchant cash advance. A merchant cash advance does not make emphasis on one’s credit requirements. It also does not require collateral as it has already collateralized the business’s future credit card sales.
The application is effortless and once approved, money is wired to your business’s bank account or any other account in accordance with the lender’s specifications. Funding can take as little as two days. Most merchant cash advance companies require prospective customers to apply online by filling out a quick application form. If you happen to be among those in need of smaller advances, you might just be lucky as some companies may not run credit checks.
The three most important requirements include:
• It requires the business to have been up and running for six months or more.
• It also looks into the business’s minimum credit score which should not be less than five hundred.
• The prospective client’s business should also have a monthly business revenue of fifteen thousand dollars or more.
Other factors that various merchant cash advance companies may look into include the business owner’s creditworthiness, driver’s license, voided business check, bank statements among others.
Why choose this over traditional bank loans?
• It is collateral-free as it does not require the provision of any personal or business assets for cash advance approval.
• It is very quick and efficient as it could come in handy in times of emergency taking a couple of weeks or less aided by its easy application process.
• There is no credit check which in most cases applies to advances of smaller amounts obtainable with less-than-perfect credit scores.
• Repayments are based on sales as opposed to traditional bank loans which offer loans on strict fixed repayment terms. This goes a long way to cater to those small businesses with inconsistent levels of income.
• High borrowing limits as some lending companies may be willing to offer more than what traditional banks would offer to small businesses.
• It is suitable for various business purposes.
Drawbacks of merchant cash advance
• It is costly as its terms may be spread out for up to a year hence forcing one to incur expenses when compared to other types of business financing methods.
• There is a lack of regulation which gives a merchant cash advance company a leeway when it comes to disclosure of its fees hence it may be wise to involve an expert to elaborate the ambiguous points before agreeing to any contract.
• It can be risky as past sales may fail to match future ones hence not a preferred long term solution.
• It does not facilitate saving for a period of time thus hindering business expansion as a daily deduction of credit card receipts reduces cash flow.
• There is no benefit to repaying early as in some traditional banking methods such as getting interest savings.
It is imperative to understand how this money lending criteria works to establish if it will be a great fit for your business. It is also of importance, that one is realistic and objective before choosing merchant cash advance as a financing method, in order to avoid future regrets.