A Merchant Cash Advance Guide
How merchant cash advances work?
A lender will purchase a small percentage of your future credit card sales, until the payback is completed and will give you upfront the cash advance money your business needs. Often times the business owner will be approved even with a less than great credit history record, making a merchant cash advance a top funding choice.
How do the lenders make money?
Funding charges can widely vary, and that’s not just from one lender to another, but from one cash advance to another. For example, the payback on a $10,000 cash advance could be as low as $11500 or as high as $14,000 dollars.
Even though there is a fixed payback daily percentage, and because of that, theirs is no fixed monthly payment, you pay as you sell; the payback factor varies depending on your business sales and the amount of money asked for.
If your business is doing well and sales are good, the advance lender collects the money sooner making the payback amount rather high. Since there is no time limit on paying back the loan, the annual rate will decrease as the payments will be extended over time, although the lender typically forecasts a rather short term for payback, it could usually take less than a year.
There are no questions that the merchant cash advance cost for this kind of unsecured funding is going to more expensive than the cost of a traditional loan, but if you understand the advantages of a cash advance and know how hard it would be to qualify for a bank loan, you will find that a merchant cash advance is a great option.
Often, business owners interested in funding programs like this may have a less than perfect or even bad personal credit history. They may have credit history records like past tax issues, a list of delinquencies, collections, liens or even judgments that would be an automatic red flag for a traditional bank loan. Instead, the merchant cash advance industry is here to help businesses that can’t qualify for traditional funding methods.
The lender risk:
There is a rather high risk when providing these types of unsecured funding options (hence the higher cost to the business owner for the money), but they use advanced funding models to determine the possible future credit card sales. They also offer the cash advance with fairly short payback terms to help counter the risk.
Although the approval is much easier than it is with most bank loans, few cash advance lenders will lend to new merchants or start-ups without a history of credit card statements. Even less lenders will approve amounts larger than what the business can predict to earn from credit card sales in a year.
The merchant cash advance lender takes all of the risk, but since it is paid out of projected future sales, it is typically a risk worth taking. Seasonal businesses that need cash flow to move them through slow seasons or merchants, who have an unexpected low season, may find a need for a cash advance until business picks up.
Merchant cash advance lenders say that slow businesses are not the only merchants interested in this funding method. Most types of businesses are often ignored by traditional banking institutions.
There are many times when owners of healthy small businesses could use cash flow or working capital to help build their businesses but don’t qualify for the traditional bank loans. These include franchise owners who have exhausted their personal savings to purchase their franchise and would like to open another one; merchants who can buy bulk inventory at discount rates or move into a new, more efficient location; expansions; new equipment; or simply the desire to move forward on a great new opportunity.