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.
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?
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?
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.
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.
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?
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 advances online 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!