Merchant Cash Advance Financing

Running your own business gives you independence, limitless possibilities to follow your dreams and expand your horizons. It is definitely better than working for someone else, isn’t it? As good as it sounds, everything is associated with…money.  

Merchant Cash Advance Financing
Merchant Cash Advance Financing

If you are a novice entrepreneur and need additional funds to develop your plans and ideas, then you should start considering the available options. You could borrow money from a friend, a bank or another credit organization. That is the obvious and probably the simplest decision.

However, you should always think twice. There must be another way. In fact there is and it is called ‘merchant cash advance financing’.

 

Why merchant cash advance financing can be good for your business?

Why merchant cash advance financing can be good for your business?
Why merchant cash advance financing can be good for your business?

To answer that basic question, we should explain the term’s meaning. The first thing to know is that merchant cash advance is not one of those quick loans for business. As the name suggests, it is an advance based upon credit card sales or future incomes of a business. In brief, you are going to sell a part of your revenue in order to acquire the necessary capital immediately.

Compared to traditional banks, the providers of that service weigh credit criteria and evaluate risk in a different way. They determine if your business would be able to repay the advance on time by examining your credit card receipts and daily receivables.

When it comes to the annual interest rates, they are usually higher than those of small business loans. The difference may be double or even triple. What’s more, sometimes businesses that do not qualify for quick loans for business have a good chance to be approved by a merchant cash advance provider.

 

Who can benefit from merchant cash advance financing?

Who can benefit from merchant cash advance financing?
Who can benefit from merchant cash advance financing?

Merchant cash advance financing is designed for firms to obtain regular cash flow through their merchant account. In other words, the business owner should have constant credit card payments and other receivables or payment streams.

Before you proceed to action, make sure that all the terms and conditions included in the contract are clear to you. Do not forget that they can affect your potential ROI. Read the contract thoroughly and ask questions if you have any. This ensures that you are making an informed financial decision.

How does merchant cash advance financing work?

You must reach an agreement with the provider on the advance amount and the payback amount as well as the holdback percentage. Once it is done, the funds will be transferred to your business’ bank account.

You must reach an agreement with the provider on the advance amount
You must reach an agreement with the provider on the advance amount

Every day, the agreed upon holdback percentage of the credit card receipts and daily incomes will be withheld to repay advance. That will continue until the amount is repaid in full. You will have access to your merchant account which removes the need for collateral which is required for small business loans.

The repayment amount depends on the daily balance in your business account. So, the more transactions your business does per day, the faster you will be able to pay back the advance. The draw will be relevant to your incoming deposits into your merchant account. Even in times of slow business, there is nothing to worry about – the amount will be less.

About the costs

If you use merchant cash advance financing, then you are probably going to pay back between 20% and 40% of the advance amount. That percentage is the so-called factor rate which is equivalent to 1.20-1.40. Holdback rates are normally in the range 10%-20%. Both may vary depending on the merchant cash provider.

About the costs
About the costs

Remember that the holdback amount which your business will pay on a daily basis is not the same as the repayment for the entire amount borrowed. You must understand the distinction. For example, you may have a holdback of 15% and a repayment of 30%. It means that if you have an advance of
$10 000 and your factor rate is 1.30, then you will have to pay back $13 000. Until that amount is collected, your merchant account will be withheld with 15% of the credit card sales or revenues. If that is about $14 500 monthly, then you will have to give back $2160. In this case, the merchant cash advance would be repaid in almost six months.

The holdback percentage is based on three main factors: the overall advance amount your business gets, length of the period of repayment and size of the receivables per month.

How to request?

How to apply?
How to apply?

Since merchant cash advance financing is not a traditional loan, the application process is not complicated and the approval is faster. Here are the usual steps you will have to take:

  • Apply for the advance by writing two pages of data about your business. That could be business tax ID and your social security number, etc.
  • Provide bank statements and any other documents showing payments or credit card processing information for several months
  • Get your application approved. That usually happens within 24 hours.
  • Switch to a new credit card processor if your provider requires it. That may seem as a complicated but some providers of merchant cash advance financing require it.
  • Finalize the details – make sure that you know when the whole procedure begins. It could be the very next business day.
  • Receive the money – the merchant cash advance will be deposited into your merchant account. The repayment is going to be an automatic process.

Keep in mind that merchant cash advance financing will not have any effect on your credit history. So it will not help you build business credit rate. That is the main reason why some people prefer using small business loans. They are easily accessible online and offer many of the conveniences of merchant cash advance financing. Both options have their pros and cons – choose the one which would be more useful for you and your business!

What Are Merchant Cash Advances

These days, many people are having trouble with their finances and find it hard to sustain a stable financial situation. The month-to-month struggle with regular payment and emergency bills are not something only individuals have to face. Nowadays, there are many small businesses that go through tough times on a regular basis.

merchant cash advance may just be the right solution for your problems
merchant cash advance may just be the right solution for your problems

When a small business owner has trouble paying his employees, not to mention when he wants to expand that business but simply does not have enough funds to do so, usually the only way to keep the business running and growing is by taking out some form of financial assistance. For many small business owners out there, there is one specific type of funding that stands out and that is merchant cash advance.

If you own a small business and you are going through a tough financial period, taking out a merchant cash advance may just be the right solution for your problems. Whenever a financial decision has to be made, the knowledge you have of your options is essential. This is why in order to make your life a bit easier, we are going to explain what a merchant cash advance is and how it can benefit your small business. So if a time for it comes, you will have better judgment of whether a merchant cash advance is the answer to your financial troubles or not.

What is a merchant cash advance?

Merchant cash advances, also referred to as credit card funding
Merchant cash advances, also referred to as credit card funding

Merchant cash advances, also referred to as credit card funding, are one of the most popular financial funding tools for funding small businesses. Normally, a merchant cash advance is a quick, simple and very efficient way to breathe life into your small business. In order to be eligible for a merchant cash advance, your small business should have a credit card sales volume that is rather easy to predict. Every merchant cash advance company is going to offer you different merchant cash advance terms. However, with each merchant cash advance company, these terms will be mainly dependent on how stable your credit card sales volume is.

Normally, the process of merchant cash advance funding goes like this: the merchant cash advance company purchases a fixed sum of your future credit card receipts at a certain discount. After that, the merchant cash advance company grants you a loan in an amount that usually can go up to $170,000. Then the merchant cash advance company gets a percentage of your future credit card sales. The percentage that the merchant cash advance company takes must be fixed.

Before deciding on a merchant cash advance, it is always going to be better if you do research
Before deciding on a merchant cash advance, it is always going to be better if you do research

The merchant cash advance company is going to receive that percentage of your credit card sales until the merchant cash advance is fully repaid. Before deciding on a merchant cash advance company to work with, it is always going to be better if you do research, make a list of different merchant cash advance companies that more or less are offering terms that fit your specific financial situation, and narrow down that list until you pick the best merchant cash advance provider.

Once you have chosen a merchant cash advance provider to work with, you will have to go through the merchant cash advance application process. The application process for a merchant cash advance is fairly fast, as it would normally take no more than two weeks to go through the whole process. Other thing you should know about merchant cash advances and the companies that provide this service is that many merchant cash advance companies do not care and have no say in the exact ways you are going to spend the money that you are getting from them.

And since you are the person who knows best the situation of your small business is in, you will be able to fund it exactly as you deem fit. While it is true that a merchant cash advance can usually be more expensive than some of the alternatives that small business owners can choose from, a merchant cash advance is most likely the service that can get your small business going in no time and also give it the opportunity to gain momentum and continue its development.

Advantages of merchant cash advances

If you still have not made up your mind on whether a merchant cash advance is the right solution for your financial struggles, here are some advantages that merchant cash advances have to offer:

 

  • The service is really fast compared to other funding methods for small business

the service is really fast
the service is really fast

Much like with some small business loans or credit lines, when you decide to apply for a merchant cash advance, the whole process normally does not take more than a couple of weeks. Adding to that, you have the option to go through the whole process online. That means that you may be able to get hold of the funds you need without even having to leave the comfort of your home.

  • Having a stellar credit score is not an absolute requirement

If you have tried taking out a business loan from a traditional loan lending institution in the past, you would know that getting such loan is usually only possible if your credit score is perfect or close to perfect. With merchant cash advances, the situation is a bit different. The companies that provide this service are not really that interested in the state of your credit score, but rather in your ability to pay back the loan they are going to give you based mainly on your credit card sales and their consistency. Having said that, you should keep in mind that using a merchant cash advance will not really help in building your credit. The reason is that many merchant cash advance companies do not send any reports to the credit bureaus.

Merchant Cash Advance Loans

Merchant cash advance loans have become very popular over the last few years. These merchant cash advances are known to be easy, accessible and a fast way to provide finance for a small business, especially if banks or other financial institutions would not lend money to them for various reasons.

Merchant Cash Advance is not a loan

Merchant cash advances
Merchant cash advances

Although a form of a short-term financing for the small business, merchant cash advance loan is not  typical credit. It was initially designed to be a prepayment financial solution where the lender provides a certain amount of money against the obligation of paying a portion of future credit and debit cards sales of the small business. Because of the convenience offered – operable money instantly against deductible portion of every sale on daily basis, the merchant cash advance has quickly evolved into a less complicated tool to fund your small business.

Traditional loans usually provide financing with a longer term of repayment and they require more paperwork. The company should also have a solid background, be in good standing and secure the  loan with proper collateral. After all documents are gathered and provided, approval of banks may take a while. Small businesses are often unable to meet such standards. Merchant cash advance, on the other hand, is an efficient way to obtain the required funds only against the obligation to pay a small portion of your everyday sales (8% to 13-15 %, depending on the provider) for a shorter period (typically up to 24 months). The repayment is arranged through the processor of the credit or debit cards payments. Because it is done daily, there is no need to have a stable cash reserve on maturity date or worry about pay dates and penalties. The remittances of the small business are collected directly by that processor day by day until the merchant cash advance is fully paid up. The repayment starts almost immediately. There is faster access to the much needed capital and there isn’t the pressure of having to make regular installments make the merchant cash advances the preferred choice for small business financing.

Personal credit score would not be considered.

faster access to the much needed capital
faster access to the much needed capital

The very structure of the merchant cash advances significantly differs from traditional loans and therefore the merchant cash advances are not considered as such. They depend on future sales and for that reason, the business should have steady credit and debit card sales. The sales volumes are analyzed by the potential provider of the merchant cash advance and the assessment would determine how much a business could get in the cash advance. It may be between 80% and 150% depending on past sales flow and the policy of the merchant cash advance provider. Personal credit score would not be considered. If your small business has reliable sales history and a predictable volume of credit cards sales for a certain period, you should have no problem of receiving upfront funding.

Besides, easy accessibility is another advantage of merchant cash advances. The merchant is given greater freedom in operation of his income regardless of whether sales is slow or good.

Ways of repayment of Merchant Cash Advance

Ways of repayment of Merchant cash advance loans
Ways of repayment of Merchant cash advance loans

There are two usual ways of repayment. The first one is the most popular and favored. The deduction is done by the processor of card payments and the income is immediately split between the merchant and the advance cash provider. The second option requires for all profit from credit cards sales to go into a special account and the split is done after that (not very popular due to time required for both sides to receive their portion). In the second option, the account is debited on daily basis again – it just takes longer to process.

 

How much does it cost to repay the Merchant Cash Advance Loans?

How much does it cost
How much does it cost

Being as easy as it sounds, this type of financing is relatively more expensive than a bank loan. The granted amounts are to be repaid in 9-10 %, up to 50%. Of course, due to the daily deductions, business would not feel the burden of repayment so heavily if sales run well.

Advantages and Risks

But merchant cash advances have both advantages and disadvantages. If your company suffers from slow payers, this could end up being a problem. High profit margins would allow you to benefit from the repayment methods and keep and earning, while the other way around may temporarily freeze your profit as it is deducted to cover your debt. Careful consideration of your sales and knowing where your small business stands would help you avoid that risk.

Merchant cash advance is offered by companies specialized in this type of funding. Not being a loan under the law allows much flexibility. There is no restriction as to how much your interest rate could be (could be negative at times) and there is no restriction on how you could use your upfront funds (positive). It should be noted that this type of financing is designed mainly for small businesses with steady sales that could easily pay off the debt in the short term given.

Merchant cash advance providers reserve their right to adjust their offers. So it is a type of debt that carries both risks and benefits.  

Business Merchant Cash Advance

Business Merchant Cash Advance
Business Merchant Cash Advance

At first glance, the concept of merchant cash advance sounds noble and overly-generous. Someone may even look at the promises of various merchant cash advance companies as dangerously close to those of dubious enterprises that sell services such as 100% secure loans or 100% guaranteed loan match. The idea is that the legal enterprises known as MCA (merchant cash advance) companies loan finances businesses that cannot qualify for bank credit.

The creditor then gets his money back by receiving a pre-arranged portion of the subsequent sales that the merchant carries out. The borrowers who benefit from merchant cash advance loans the most are predominantly small businesses, startups with small cash flows, and businesses with bad credit scores. And while this is an option that undoubtedly sounds appealing, the coin has two sides and merchant cash advance, like many other financial tools, can sometimes be a double-edged sword for the debtor.

How does a business merchant cash advance work?

How does a business merchant cash advance work?
How does a business merchant cash advance work?

The mechanism behind merchant cash advance is relatively simple. We can use the example of a small local bookshop that desperately needs to raise $15,000. Unfortunately the owner is unable to apply for a business credit since the bookstore is brand new and he cannot afford to put up a collateral. As an alternative, he turns to the services of a company that offers merchant cash advance loans. The MCA company decides to make a lump-sum payment to the applicant in exchange for $18,000 from his future credit card sales.

Note that the company does not give the bookstore a specific period of time in which it should return the debt. Instead, they calculate a percentage of the future customer credit card payments and this percentage is to be transferred from the bookstore to the MCA company until the advance is fully repaid. Whether the payment is to be made on daily, weekly, or monthly basis depends on the arrangement between the bookstore and the merchant cash advance firm.

So instead of setting a fixed payment term, the MCA company collects the agreed portion of credit card sales until they get their funds, plus the interest back. Typically, this happens within a time span shorter than 12 months. However, there is the exception where the businesses do not go as well as planned and the advance turns into an inescapable burden that keeps draining the merchant’s cash flow. Having your business not go exactly as planned is just one of the many considerations that should be taken into account before rushing into the doors of the nearest MCA firm.

Disadvantages of a merchant cash advance

Disadvantages of a merchant cash advance
Disadvantages of a merchant cash advance

Times of financial instability and credit crises are when the business of merchant cash advance business usually booms. What happens is that in an environment where credit terms become more unappealing for small businesses and banks tighten their loan regulations, entrepreneurs in need of a quick financial boost readily embrace the idea of merchant cash advances. Unfortunately, in their enthusiasm, a lot of them choose to turn a blind eye to the possible negative impacts that a financial strategy like ould have on their business.

The devil is in the detail. In the case of merchant advance loans, the devil is in how this type of cash advance is treated by the law. The catch is that, although a merchant cash advance sounds strikingly similar to a typical banking loan with just slightly unorthodox payment terms, it is actually not a loan. From a legal perspective, that is. Instead of business credit, the merchant cash advance is considered a sale of future debit/card sales, or more simply put, a sale of future income with interest attached to it. What this means for the firms that offer merchant cash advance for small business is that they function in an area that is considerably unregulated.

Therefore, in setting the terms and interest rates on their lump-sum payments to merchants, the MCA companies do not have to abide by any kind of usury laws. As a result, the interest rates in the industry can triple the usual interest rate charged by, for example, credit card companies. A situation where the merchant has to pay 50% over the borrowed sum in exchange for the MCA service is not something unusual. Since they are not bound by government’s laws that limit interest rates, merchant cash advance enterprises are free to operate in whichever way they deem fit. History has shown that it is always going to be small business owners with insufficient equity as well as businesses with poor credit history that would desperately use the financial stimulus. Those who are considering taking out a merchant cash advance loan should think twice before signing up for one.

What you need to know about merchant cash advances

What you need to know about merchant cash advances
What you need to know about merchant cash advances

In conclusion, merchant cash advance loans are definitely not everybody’s cup of tea. Although the service may initially look tempting for small business owners, there are a lot of things that should be taken into account.

One of the most important is the fact that small businesses usually operate with small cash flows. And since MCA companies take their percentage off the merchant’s cash flow, the abnormally high interest rates that they charge compared to other forms of financial credit services may end up doing more harm than good for the business. So, if you have decided that the merchant cash advance loan is a good financing option for you, be sure to do your homework. Always insist that the MCA firm gives you an estimated A.P.R. for your merchant cash advance. Always familiarize yourself with the payment terms. And always explore as many merchant cash advance companies as possible before making the final decision.   

 

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