What is a Merchant Cash Advance?
A merchant cash advance is a form of credit whereby a small business owner is approved for cash in exchange for an agreed-upon proportion of future revenues.
This option is characterized by a shorter repayment period and regular installments over a particular period.
It is crucial to note that this product is ideal for a business person with inadequate assets, but with a high volume of business transactions.
Bear in mind that this facility is usually suitable for entrepreneurs whose revenues are derived primarily from card sales. Also, note that this product may also be available to businesses whose transactions are not entirely based on cards.
What You Need to Know About Merchant Cash Advance
If you need fast cash that you can’t qualify for because of your low credit score, then a merchant cash advance is an ideal solution for you.
How Merchant Cash Advance Work
A merchant card advance is a loan facility that is offered to a business based on its card transactions. Once you get this facility, you are supposed to pay a certain proportion of it plus charges until you clear the outstanding balance.
Depending on the agreement with your financier, you may pay daily or weekly. Note that the amount repaid is based on a proportion of the balance in the merchant’s account. This implies that if a business has a lot of transactions, it will pay more and be able to clear the loan early.
You can repay your merchant card advance in two ways: first, by using a proportion of your future card sales; and second, through direct remittance from your bank account. The latter option is for those businesses that don’t deal with card transactions.
A fixed repayment is made irrespective of whether sales are down or up. Unlike a business term loan, with a merchant card advance, you are allowed to repay your credit daily or weekly until you clear the facility.
With a merchant card advance, the fees you pay depend on the level of your creditworthiness. This fee is determined using a factor rate, which is usually between 1.2-1.5%. Therefore, if you want to calculate the total costs you are supposed to pay, just multiply the amount of advance with the factor rate.
The loan duration for this product is up to 12 months. It is crucial to note that you are likely to clear your loan early if your credit sales are higher. Therefore, your loan may take longer or shorter than expected based on the volume of your daily or weekly card sales.
How to Determine the Cost of a Merchant Card Advance
The total cost you incur on your merchant card advance is based on your annual percentage rate (APR). It is vital to note that APR is composed of a factor rate plus other charges. The size of APR determines how long it will take to clear the loan.
Benefits of a Merchant Cash Advance
The following are the pros of a merchant cash advance
They are fast to acquire
Applying for a merchant card advance is a straightforward process, and you can only take up to one week to get your loan approved. Unlike other business loans, lenders only consider the volume of your card sales and not your credit score.
No collateral requirement
With a merchant cash advance, you don’t have to put any assets for security. If your business performance is terrible, there is no worry about losing any of your assets to the lenders. However, in some instances, you may be required to sign a personal guarantee as a pledge that you will take responsibility to repay the facility.
Note that you will only pay depending on the volume of sales transactions.
Easy application requirements
For your funds to be approved, lenders require manageable conditions, such as your ID, an application form, and a bank statement.
Flexible requirement on credit score
With a merchant advance, you can get funded not based on your credit score, but the volume of your daily or weekly card transactions.
Many businesses fail to qualify for other credit facilities. However, with a merchant cash advance, you are eligible even if you have little experience in the industry.
Flexible use of the funds
The providers of merchant cash advance don’t impose conditions regarding the usage of the loan. Once you receive the fund, you are free to use it the way you want.
Downsides of a Merchant Cash Advance
High cost of finance
The annual percentage rate for a merchant cash advance is high. Therefore, before you borrow, evaluate different lenders to find the one with the cheapest factor rate.
Sometimes, you may find it hard to pay the cash advance because of low sales. The poor business performance may prompt you to take another loan facility to ease the burden, and this can plunge you into more problems.
Like a term loan, a merchant cash advance is offered to you in lump-sum. Therefore, this product is not ideal in solving your cash flow challenges.
They may fail to offer an appropriate solution
The repayment of the facility is made based on the proportion of your daily or weekly sales. Note that this kind of compensation can reduce the availability of your cash flows, hence making it impossible to finance your business activities.
Alternatives to Merchant Cash Advance
Before settling for a merchant cash advance, it is vital to explore the other options. The following is a highlight of some of the facilities that you can consider for your business needs.
With a microloan, you can get up to $50,000 to cater to your working capital. As a merchant cash advance, microloans are easier to get because you don’t have to obtain a correct credit score. It is vital to note the federal agency guarantees microloans, hence they have an extended repayment period with manageable installments.
Sometimes, your customers may delay making payments, hence making you experience liquidity problems. In such a situation, you can sell your account receivables to lenders at a fee. Usually, financiers can offer you up to 80% of the value of your invoices.
What Business is Eligible for Merchant Cash Advance?
A merchant cash advance is a credit facility that is suitable for businesses that experience difficulties in getting traditional loans. It is vital to note that you can get this facility irrespective of your duration in business, credit score, or any other factor.
In brief, what is required of you is a credit score of at least 500, consistent cash flow, and more than two months of business experience. However, note that you may fail to get financed if inconsistent cash flows characterize your business.
Methods of Repayment for Merchant Cash Advance
Usually, merchant cash advance is paid daily; however, there are some instances where you can repay on a weekly or monthly basis. The following is a highlight of the methods you can use to repay your merchant cash advance.
Split payment Processing
Split payment processing is an arrangement you make so that your payment processor subdivides sales between you and your financier according to the agreed-upon proportions. The processor remits payment to your donor and sends you the remaining balance. This method is automatic, and it works well when your funder uses the same processor.
Automated Clearing House (ACH) Payments
ACH is one of the commonly used methods of repaying debts. It is crucial to note that ACH may be fixed or variable. With a variable ACH, the provider deducts a particular percentage from your sales and then remits it to your funder. The amount deducted varies with the volume of sales.
For a fixed ACH, the provider deducts a fixed amount of payment irrespective of the number of sales you make. It is vital to note that with a fixed ACH, you may negotiate with the funder to reduce the amount of your loan repayment if your sales decline.
With lockbox withholding, your funder initiates the creation of an account under your name but their control. With this arrangement, you will let your sales pass through this account. Therefore, the lender will deduct their proportion and remit the remaining balance to your business.
What to Consider When Evaluating Your Merchant Cash Advance Offer
Before you accept the offer, it is vital to consider the following factors.
Cost of capital
The cost of capital entails an annual percentage rate (APRP). It is vital to bear in mind that APR encompasses both the factor rate plus any other fees charged by the fund provider.
The monthly repayments
Evaluate whether the monthly repayment is conducive to you. If the monthly installment is too high, it might make you experience cash flow problems.
Find out whether there are charges for early or late loan repayment. Compare these fees with other providers and select the cheapest.
Merchant Cash Advance Application Process
The following are the steps you are supposed to follow to apply for a merchant cash advance.
Fill up the application form
The application form for this facility doesn’t require a lot of details. For you to apply for this product, you must fill the form with your details, such as tax ID, social security number, and many more.
Besides filling the application form, you are supposed to provide your funder with the following documents: bank statements, copy of a lease, and business license.
After submitting your application, your fund request may be considered in less than a day.
Credit card processing
Sometimes, you may be required to switch to a different credit card processor to facilitate the approval.
Receive the funds
First, the money will be banked into your bank account, and then automatic repayment will start via the merchant account.
Can a Startup Get a Merchant Cash Advance?
A merchant cash advance is ideal for inexperienced entrepreneurs who are unable to meet the requirements of traditional lenders. If you are a startup, this facility is appropriate for you. Usually, funders offer this money based on one’s cash flows and not on credit rating or business experience.
How to Repay for Your Merchant Cash Advance
The amount you pay for the advance depends on your daily revenues. It is crucial to note that your funder may either take a certain proportion of regular credit card sales or a percentage of the entire business sales.
How to Get the Best Factor Rate
A better factor rate means a reduced cost of funds on your cash advance. If you want to get the best price, first determine how much money you need based on your needs.
Whatever amount you arrive at should neither be too much nor too little for you. Borrowing beyond what you require means that the cost of the funds will be more, and applying for little money means that you won’t meet your financial requirements.
Final Thought on Merchant Cash Advance
A merchant cash advance is an arrangement whereby a business person is given funds to repay based on a certain proportion of their daily or weekly card sales. If you are an entrepreneur with a low credit score and little business experience, then this product is ideal for you.
With a merchant cash advance, the amount you repay is based on a proportion of the balance in your account. This implies that if a business has a lot of transactions, it will pay more and be able to clear the loan early.
You can repay your merchant card advance in two ways – through a particular proportion of your future card sales and via direct remittance from your bank account.
Note that the latter option is for those businesses that don’t deal with card transactions. However, a fixed repayment is made irrespective of whether the sales are down or up.