Merchant cash advances aren’t really loans – they’re cash advances in exchange for a percentage of your debit and credit card sales. There’s no need for collateral, and it’s a quick way to get a cash advance for your business, even if you don’t have the best credit. Merchant cash advances work by agreeing to pay a percentage of your daily sales to the lender, this way you don’t have to prove your creditworthiness and can receive funds quickly. They can be paid back through Automated Clearing House withdrawals from your bank account, and since the payback is based on a percentage of sales, the amount you pay back increases or decreases based on daily sales. Merchant cash advances, often end up being the most pricey option for business funding – since they’re paid daily, it can cut into cash flow.
Do You Qualify?
Usually, businesses with little to no collateral, limited history or a lower credit score can still qualify for a merchant cash advance. Almost anyone can get one because most providers have simple eligibility requirements. It can be a convenient way to finance if your business makes a lot of revenue on debit or credit card payments – such as a restaurant or boutique. It’s not so great if you get revenue from invoices.
How to Apply
Merchant cash advance providers will look at your credit card processing statements to make sure that your business brings in enough revenue to pay them back. Some will look at your credit score but often won’t put too much weight on it. Their applications are often online via online lenders, so the process is simple and quick – you can often be approved the same day you apply. The documents you’ll need are:
- Driver’s License
- Voided business check
- Bank statements
- Credit score (maybe)
- Business tax returns
- Credit card processing statements
Merchant cash advance lenders use factor rates instead of interest rates. Factor rates are usually given in decimal figures as opposed to percentages, and they’re calculated by dividing the financing cost by the loan amount. When all the math is figured out, these tend to be much higher than loan interest rates, unfortunately.
Factor rates usually range from 1.14 to 1.48 and are determined by similar factors that determine interest rates for a loan – time in business, industry, sales, business credit – and also factors unique to cash advances, like average monthly credit card sales. Be aware that factor rates can be structured to make expensive loans seem cheaper, and you usually have to pay the interest upfront, so paying off your loan early won’t take away from your interest charges.
The average payoff time for a merchant cash advance is around eight or nine months, but can be between four and 18 months depending on your business.
Is a Merchant Cash Advance a Good Choice?
Merchant cash advances have some of the highest fees of any lending option, making them the most expensive type of borrowing for your business. They can offer some decent alternatives to taking out an actual loan, but it’s mostly up to how you’d like your business to operate. Here’s what gives them some appeal to borrowers, despite their price:
- They’re very quick. If you’re in a bind and need money to run your business, merchant cash advances will provide it quickly and relatively easy.
- Getting a loan requires you to pay back the same amount each month, regardless of your sales. A merchant cash advance makes you pay a percentage of your sales, so during slower times, you’ll pay a lower amount, and thus not cut into your cash flow as much.
- Merchant cash advances are also unsecured – they don’t make you offer up collateral. This is valuable for business owners who don’t have the means to put their property on the line.
What Will It Cost You?
The factor rate is calculated by dividing the cost of the loan by the loan amount. To figure out how much you ultimately payback to the provider, you should multiply the factor rate by the total cash advance amount. To make these fees more tangible, here’s an example:
If your factor rate is 1.30 on an advance of $10,000, your total payback is $13,000.
This means that, if it’s being compared to an interest rate, you’re paying back 30% of the amount you borrowed. This may be worth it if you are in a business bind, but in the long run, you’ll be paying significantly more than a usual business loan.
Always make sure you shop around to see if there are other borrowing choices for your business before you choose a merchant cash advance. This can all sound very overwhelming, but that’s why we’re here. When you sign up with FaasFunds, we analyze your business needs and finances and figure out if a merchant cash advance is the best option for you. We’ll also link you up with an industry expert to help you through tough financial decisions. Navigating the financial world is tough, so make it easier with FaasFunds.