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Who should get a merchant cash advance bad credit

Who should get a merchant cash advance bad credit

MCAs great for businesses who need fast cash and have a well established credit card transaction history. Retailers, or restaurants, are great examples of candidates. Cash advances can also be great for newer businesses who have a great history of credit card sales, but haven’t been operating long enough to build a credit history that traditional lender looks for.

Why business owners should be careful

There’s a lot of benefits to MCAs, but there’s downsides too. There’s one specific downside which can outweigh everything else – the cost. The costs involved with a merchant cash advance can easily outweigh anything else you might get in terms of convenience, etc.

Factor Rates

Unlike a traditional loan, a cash advance doesn’t have an APR. Instead, business owners who take a mca pay a factor rate. The factor rate is a decimal point number which represents the amount you have to repay to the provider who gave the cash advance. This can fee can vary, but will be between 1.1 and 1.5. The factor rate is one of the most confused, and misunderstood, aspect of a cash advance because it makes the interest rate look lower than it really is. When you actually look at the number, you’ll see that getting a cash advance is potentially very expensive.

Here’s a good example. Say you take a cash advance of $50,000 – and have a factor rate of 1.3, with a 12 month term – the breakdown is the following. When you multiply the factor rate by the advance amount, you see the totally repayment comes to $65,000. When you look at initially, you’re paying an interest rate of 30%, but the APR could be higher based on the holdback amount.

If you agree to a holdback rate of 15% of daily billables, and your monthly credit card sales average $35,000 over the next year – the daily payment would be $175. The loan would take 372 days to repay. This would put the daily interest rate at 0.15% and the overall APR would be 53.9%. This is double the 30% rate you initially thought you were paying. If your business makes $40,000 in monthly credit card sales, then the APR would climb even higher to 61-62%. When you consider a cash advance using the numbers above, you can see that it’s super expensive money – and you need to be careful before accepting it.