What Is a Merchant Cash Advance?

Does your business require a substantial amount of money right now for various expenses or work plans? You could consider a loan, but it might not be easy for you to get approved for one. You may need those funds as soon as possible too. That’s where a merchant cash advance comes in handy. 

A merchant cash advance is an agreement where a provider offers funds to a business in exchange for a percentage of that business’ income from credit card payments. The group gradually pays back the advance through those credit card transactions.

The process is useful if your business needs help right away. But there are risks associated with an advance to watch, especially surrounding how well you can pay for the effort.

The Main Parts of the Advance

Your merchant cash advance will include a few essential features:

  1. Amount – You can specify how much money you need in your advance. It can be tens or hundreds of thousands of dollars.
  2. Factor Rate – The factor rate measures how much you’d have to spend on your advance. You can multiply your advance amount by the factor rate to review the total repayment amount for your advance.
  3. Deduction Value – The deduction value entails a percentage of your daily or weekly credit card transactions that will be reserved for paying back the advance. You could have 10 to 20 percent of your daily card payments reserved to cover the advance, for example. The total should be something you can support without negatively impacting your daily cash flow or profit margin.
  4. Term – An advance will feature a term listing the approximate amount of time you’ll need to pay for the advance. It could be twelve months or more in some cases. The term could be shorter if you bring in more credit card payments to help you pay things off in less time.

For example, you might get a $50,000 advance with a 1.15 factor rate. You would have to repay $57,500 in that case.

Let’s say you take in about $2,000 in credit card payments each day, and you have a deduction value of 10 percent. Your business will move $200 to the advance provider each day. With that in mind, it would take 287.5 days to pay off the advance.

Your funds can help you cover many expenses at your business. But the advance is only worthwhile if you have a suitable plan for how it will work. You’ll need to look at how long it would take to cover the advance and how deep it will cut into your profit margin and cash flow.

Additional Terms To See

There are some other terms to notice when finding an advance:

  • The advance will not require collateral. Your credit card payments will cover the expense, meaning you won’t risk losing anything if it takes a bit to pay for something.
  • While your advance may feature a term, it is likely an estimate of how long it would take for you to pay off the advance based on the info you send to your provider.
  • It is easier to get approved for an advance, as most providers will not require extensive credit reviews. You can use an advance if you have been rejected for a loan due to having little to no credit.
  • There are no limits on how you can use the funds in your advance. You can use it to support expansion efforts or to help hire new employees, for example.

Watch the Cost

As appealing as a merchant cash advance can be, you must also look at what you’re getting out of the plan. The cash advance can be more expensive than a traditional loan if you are not cautious enough.

Your advance will cost a percentage of whatever you are getting from the deal. Your daily payments will be the same throughout the entire advance period regardless of how much you bring in through card payments each day. You cannot predict how much you will spend on the advance each day, like if you had a loan.

The APR for a merchant cash advance could be higher than what you’d get from a bank loan, especially if it takes a while for you to pay off the loan. You’d spend fewer amounts on a loan if you manage its payments as necessary and if you know it might take a while for you to collect credit card payments.

The factor rate you pay on the advance can vary surrounding a provider’s analysis of your company. There’s no guarantee you’ll get a low-value factor rate on your advance, so check with what someone provides and what that party suggests you use before agreeing to anything.

What About the Processor?

Don’t forget about your payment processor. You’ll be locked into using the same processor during the life of your advance. Not all cash advance providers will support the processor you utilize. You might need to switch to a different group if necessary.

The Best Things To Consider

You can get a merchant cash advance to work well if you plan ahead. Look at how well you bring in credit card payments before choosing if you should stick with a merchant cash advance. The advance will be valuable if you can pay it off in less time.

Check on how often people pay for things at your store or business with credit cards. Since you will only pay off the advance through credit card transactions, it may not be worthwhile if you deal with cash more often.

Be sure to also see how your current financial situation is working, especially surrounding your current profit margin. An advance can work well if it doesn’t hurt your profit margin as much. But anything that requires more payments each day or week might be tough to manage, especially if you don’t collect as much in credit card payments as you would wish.

Save Time, Money, & Resources

Categories: Funding and Merchant Advances

Get Started

Ready for the ultimate credit card processing experience? Fill out this form!

Contact HMS

Ready for the ultimate credit card processing experience? Ask us your questions here.