Merchant cash advances are very useful for small business when they are in need of funds to cover their cash flow shortfalls. They are often used for inventory purchases, payment of salaries, marketing or repair expenses. Most merchant cash advance companies have certain request processes that are usually simple and fast compared to applying for regular small business loans.
Only basic information and documentation are required. This may include recent bank and credit card statements, a copy of the business lease, business tax ID, the business owner’s personal social security number and some references. Also usually required are a copy of the business owner’s driving license or some other type of personal ID with a photo and a copy of the business tax returns.
Merchant cash advance companies also provide their products to businesses with a lower credit score that wouldn’t qualify for a loan from a traditional lender such as banks and credit unions. Nevertheless, credit score is still a factor and it is being evaluated by cash advance providers based on their own specific criteria.
Usually, request process in the cash advance industry is fast and money transaction is a matter of days once the approval is concluded.
All this applies for most merchant cash advance providing companies, but they also differ from one another based on contract terms, holdback and interest rate percentages, additional fees and application criteria. They have different levels of customer support quality which is also a defining factor when choosing the most appropriate company to work with.
Therefore, it is important for business owners to do their own research before applying for a cash advance. They should not forget that this product may be very costly, with APR often exceeding 130%. Once they have decided that no other options are suitable for them, they should concentrate on finding the company that provides the easiest application process, combined with lower rates and fees and offering the highest manageable cash amount.
For example, it is not uncommon that a company provides up to $100,000 or even up to $500,000 and business owners need only several minutes to apply.
Good customer service shouldn’t be dismissed also. Trained and experienced consultants are hired by many merchant cash advance providing companies and are always ready to offer qualified help to advise their clients.
Another important factor when choosing a cash advance provider to work with is whether they will let the business owner keep his credit card processor. Very often, advance providers work with certain credit card processors because they use their software to follow the implementation of the contract with the client.
Changing credit card processor may cause some working disruption for the business. Some providers don’t require this while others may be already working with the same credit card processor as their clients.
Here are some typical qualification criteria that are required by some of the biggest industry players in the merchant cash advance market.
They all require at least 500 or 550 credit score and being in the business for at least 3 to 4 months prior to the application. As for monthly credit card sales, the requirement varies from $2,500 to $4,500 monthly sales. Processing volume is an important factor for eligibility.
The average factor rate for their advances may vary from 1.13 to 1.48. As for the percentage that is deducted daily from the credit card sales of the funded business, it may vary from 5% to 50% depending on the cash advance provider.
APRs are also quite different. There are APRs that are only 29%, but some providers require 80% or even more than 130% of the loan amount.
Another factor when choosing the most appropriate cash advance providing company is the time they usually give their clients to repay the advance amount. Repayment time starts at 4 months and some companies expect full repayment no sooner than 12 months after transferring the advance amount to their client’s bank account.
The most important factor when making the choice is how much money the provider is ready to transfer to their client’s bank account. There are various offers, starting at $5,000 and going as high as $500,000. Of course, the average loan offers are no more than $10,000. So if you need more funding, you will have to conduct thorough research to find the best option.
As for approval time, this is also a considerably important factor. All providers offer extremely fast and easy approval processes that usually take one or two business days. Also, when using online forms of application, the process may take no more than 10 minutes and when applying via phone – no more than 24 hours. After the successful conclusion of the application, the money has to be transferred to your account. This may take one or several business days, usually no more than five.
Another important factor is whether the company is open and straightforward when doing business with their clients about pricing and terms. They should not insist on expensive merchant cash advance terms. They should work with you on the best options for your business. When many clients are willing to continue working with them, this is a good sign.
It should be noted that some providers require placing a lien on your business assets. This means that they can seized in case of a default on the loan.
Others may require that the business has some time, for example, a year, that still remains on the business office lease. Thus, they can be sure that the business will keep its present physical location. Therefore, advances provided by that particular company won’t be available to online businesses.
In conclusion, business owners should be aware that there are two important types of costs that are associated with merchant cash advance. The first one is the factor rate. This is the cost charged by the provider and it is multiplied by the amount of the merchant cash advance to get the total cost of what you owe to the provider. The second one is the retrieval rate, which is the percentage of the daily debit and credit card sales of the advanced business that goes to the provider. The first types of costs range from 1.13 up to 1.48 and the second range from 5% up to 50%.