A Comprehensive Guide to Merchant Cash Advances: Part 2

A merchant cash advance provides a business the cash it needs right now. The business will pay for the advance as the lender takes payments from future credit card receipts. The lender may take these payments each day or week based on an agreement for the plan. The advance can be worthwhile, but it might be expensive depending on what happens. 

A Sensible Agreement 

A merchant cash advance allows a business to borrow money that will be paid back through credit card payments. The business will establish a deal where the advance provider will take out a percentage of one’s credit card collected each week or day.

The agreement requires the business to review its profit margin and to see how much it is willing to spend to pay off the advance. But the deal also gives that company access to the funds it needs in less time.

What Makes This Different From a Loan?

The process is different from a business loan since that entails the business paying back a lump sum of money at regular intervals over an extended time period. But there are many other factors that make the advance different from a loan:

  • A cash advance isn’t as well-regulated as a loan, with that being more flexible over how the payments work. Anyone who applies for an advance will need to review the terms surrounding the agreement before moving forward.
  • Any business that accepts credit card payments can apply for an advance. It is easier for businesses with little to no credit to apply. Those who have had poor credit issues in the past can also qualify.
  • Merchant advances use factor rates that entail a charge involving a percentage of the total amount being advanced. The factor rate is different from the interest rate on a loan. While the factor rate can provide a more predictable look at how someone is billed for the advance, the total could still be significant and likely to interfere with your profit margin.
  • It is easier to get funds from an advance in less time than with a loan. An advance provider can decide on the work in hours and can get the money out to someone in a few days.
  • A cash advance does not require collateral. The advance is paid for through future credit card payments, ensuring no collateral is necessary.
  • Advances work with most credit card processors. A provider can check on a business’ processing setup to see what works and if it can manage collections. Some providers may require an entity to move towards another processor, although that is not as common.

The Factor Rate Consideration

As useful as a merchant cash advance can be, there are concerns over the factor rate for something. The factor rate is a decimal point that illustrates how much the business will pay for the cash advance.

The factor rate will vary by advance, but it can be anywhere from 1.1 to 1.5 in most situations. A business can multiply what it will get in the advance by the factor rate to see the total cost of using that advance.

For example, a business may ask for a $100,000 advance. The group will get a 1.35 factor rate. The rate states that the business must pay $135,000 in future credit card collections.

That advance doesn’t have a set target date for when someone can pay everything. While the advance will not incur additional interest, the simulated APR could still be high. For example, a business could get a $100,000 loan that will be paid off over a year with an APR of about 15%. That means the business would pay $115,000 over the life of that loan.

Going back to the earlier example, let’s say the business with the $100,000 advance with a 1.35 factor rate pays it off in a year. The simulated APR will be 35%. But if the business pays it off in six months, the APR will be even higher. The company is paying more money to access the funds at this point. But if it took two years to pay, the APR would be around 17.5%.

Any business looking to find funds for future needs should look at how long it would take for it to pay off the expense. There might be times when a traditional loan would be more effective than an advance, as it may not cost as much to utilize.

Are There Other Fees?

Merchant cash advances aren’t as likely to have other fees as loans. But some providers may charge extra for starting up the advance, managing the application, and maintaining the balance. A provider should offer direct info on what it can provide and what a customer can benefit from using the most when using an advance.

Are There Other Alternatives?

There are some additional alternatives to merchant cash advances to explore. These may not be as easy to apply and qualify for as an advance, but they might have lower fees for the client to use:

  • A business line of credit gives the business access to the funds one can draw upon as necessary. The business only pays interest on the funds the group uses.
  • A business credit card allows the company to pay for items it needs. It may include rewards like travel miles or cashback deals. The APR for a card will vary, plus some extra fees may work here.
  • Term loans can be short and may not require collateral. Anything that requires extra time to pay off or is more valuable may need collateral.

Merchant cash advances will be worth noting when looking at something of value when covering various expenses. These advances are effective and easy to find, but they can be expensive if not planned well enough. A business should check on what it needs from an advance and how much it can afford to spend each day or week to pay off the total before going forward with the deal.

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