A merchant cash advance is an option for businesses that need short-term funding to cover expenses or expand their operations. Unlike traditional loans, a cash advance is based on future sales or receivables, making it more accessible and easier to obtain. The application process is typically straightforward, and cash advances are often approved more quickly than traditional loans.
However, cash advances can come with higher interest rates due to their higher-risk nature, which businesses should carefully consider before agreeing to the terms. Overall, a merchant cash advance can be an excellent option for businesses that require quick access to cash, but it’s essential to assess the terms and ensure that the business can repay the advance on time. With its accessibility, simplicity, and fast approval times, it can be a useful financial tool to help businesses manage cash flow interruptions or fund expansion projects.
How does a Merchant Cash Advance work?
At REIL Capital, we define a merchant cash advance as the quickest and easiest financing solution for small businesses. This is a common hero for many companies in need of immediate working capital, and owners with poor credit.
A merchant cash advance allows business owners to gain working capital as soon as possible, spend freely with or without a financial plan, and pay back the amount owed using a simple credit card process.
Companies tend to receive a lump sum usually between 80-120% of their monthly revenue. To pay this money back, you will be charged a percentage of your daily credit card sales or a fixed remittance from your business bank account.
What is a Merchant Cash Advance Factor Rate?
A factor rate is a number or percentage, that will determine how much you will have to pay back on your business loan. Repayment is sourced from a credit card or bank account which you use daily for or with the business; the more you sell on a given day, the more you will repay as your factor rate. Keep in mind, however, the factor rate you will pay back on the loan will stay based on the original amount, not the amount remaining.
To calculate this, multiply the amount of capital borrowed by your factor rate. For example, if you borrowed $20,000 with a 1.2-factor rate for a 12-month term, the total amount to repay would be $24,000.
Advantages & Disadvantages of Merchant Cash Advance
A merchant cash advance, like any financing option, comes with its own set of pros and cons to consider. Typically, businesses that have been declined by traditional lenders may opt for a cash advance. However, before pursuing this funding option, it’s crucial to carefully evaluate the terms and conditions to ensure the business can afford to repay the funds on time.
Advantages of a merchant cash advance include:
They act quickly: One advantage of an MCA is its speed – it is one of the fastest forms of business financing available. In fact, the turnaround time for most business owners is just a few days. This is because the approval decision is largely based on the company’s revenue and sales records, so there is typically less paperwork required, which accelerates the decision-making process.
Bad credit is frequently accepted: Another advantage of an MCA is that poor credit is often accepted. MCA providers are paid directly from credit card receipts or business receipts via ACH periodic payment, so credit ratings are relatively less important than historical business performance as an approval criterion. This can be a real benefit to business owners who have strong business performance but may not have perfect personal credit scores.
Payments Are Linked to Business Health: Payments for an MCA are correlated to the health of the business. Since the payment is based on a percentage of sales, you pay less when sales are slower and more when business is good. This means that if your sales dip, you are not stuck paying a fixed payment that is higher than you can afford. Additionally, if your deal is structured with periodic fixed ACH payments first, you have the right to request reduced payments if your actual business receipts percentage is less.
Disadvantages of Merchant Cash Advance
MCAs may prove costly: Merchant cash advances (MCA) can be more expensive than other alternative business funding methods because they do not have a fixed payment schedule, term, interest rate, or APR. Instead, the total repayment amount is based on a “factor rate” applied to the amount paid for your business receipts, taking your business revenue history into account. While an MCA does not have an interest rate or APR, the total annual financing costs including fees can be estimated to have an “equivalent” approximate APR range between 40% to 350%, depending on the funding provider, the size of the advance, any extra fees, how long it takes to repay the advance in full, and the strength of the business’s credit card sales. This makes MCA the most expensive form of business financing and should be considered carefully before opting for this method.
Higher sales typically result in speedier repayment: The repayment terms of an MCA may vary based on the structure of the deal. In a “credit card split” deal, the repayment is based on a percentage of credit card sales which means that slow sales can lead to a longer repayment period, while high sales can result in a faster repayment period, leading to higher costs due to the time value of money. On the other hand, the periodic fixed ACH payments first structure allows for more flexible payments, giving you the benefit of slower payments, which can be accelerated if you choose to do so.
Prepayment usually results in no savings: Unlike traditional loans, pre-paying a Merchant Cash Advance (MCA) does not lead to savings on the total amount due to be paid unless the MCA agreement explicitly states otherwise. In most cases, the full amount of future receivables purchased by the MCA provider must be repaid out of the business’s future receivables. Therefore, only a few MCA agreements allow for prepayment at a reduced cost, whereas most loans permit borrowers to prepay without penalty.
MCA Agreements are intricate: MCA agreements are complex despite the limited amount of paperwork required. They involve a repayment structure based on a fixed repayment amount and a stated percentage of the business’s future receivables over a specific period. However, if the merchant’s actual percentage of receivables is lower than the fixed payments for the same period, they have the right to reduced payments. It is crucial that merchants review any MCA agreement with a lawyer to fully comprehend the workings of the MCA product and how it differs from traditional business loans.
FAQ about merchant cash advances
What are the qualifications for merchant cash advances?
Qualifications for a merchant cash advance include the following:
- Must have been in business for at least 6 months
- Must have a minimum credit score of 480+
- Must have $8,000 or more in monthly revenue
What’s the difference between a factor rate and an interest rate?
Factor rates and interest rates have one major difference: principal. Instead of paying a percentage on the amount remaining as you would with an interest rate, a factor rate means you will be paying a percentage on the principal in which the loan originated.
Do cash advances hurt your credit score?
A merchant cash advance will not affect your credit score, however, non-repayment of your loan can result in a lower credit score. This happens due to an inability to pay your credit card monthly charges, or those set by your lender. Just with any credit or debit card, it is up to the user to make payments on time and in full.
How do I start a merchant cash advance business?
Any entrepreneur has the opportunity to start their own business, but as with the majority of start-ups, it requires funding to some degree. To start a merchant cash advance business, you’ll want to find a qualified lender and apply for funding by completing an application and providing documentation such as bank statements. Once you are approved, payment details will be determined and funds will follow shortly after.
Is merchant cash advance right for your business?
A merchant cash advance is the right loan for your business if you need immediate working capital and are in the position to pay it back based on your future credit card sales. If you believe your business is established and profitable or will be post-loan, then cash advances are a great option for you; you do not have to have great credit to be accepted.
If you are in need of working capital, an easy approval process, and quick access to funds, we encourage you to give us a call or apply online for a merchant cash advance. This could be exactly what your business needs to overcome the next inventory haul, equipment reorders, payroll period, or more.
