No matter who you are or how successful your small business is, there will possibly come a time when you need more money to effectively run your small business. Possibly the requirement will arise when you are in the start-up stage. Or possibly it will be years later when you are in the midst of an expanding phase. Whenever it happens, you’ll likely be overwhelmed by all the options for loans that are available out there.
A merchant or merchant cash advance is just one of these funding options; however by the time you end reading this article, at least you will understand whether this sort of financing is right for your small business or not.
With a cash advance, you are basically selling a part of your future receivables (generally debit and credit card receipts) in exchange for a lump sum of cash. Retail businesses and independent restaurants, whose customers often pay with plastic, normally benefit the most from this sort of business financing.
Factors to Consider
Before you get into the game of merchant cash advance, you and your lender must be able to agree on these following factors:
The size of the amount that your small business expects.
This number increased by the amount of a cash advance is how much you will actually need to pay the lender. For instance, in case you get $20,000 in cash advance and negotiate a factor rate of 1.3, you will be expected to pay off almost $26,000.
A Retrieval Rate:
That is the proportion of credit and debit card proceeds that will be paid to the lender every month. For instance, if your retrieval rate is 10% and you make $50,000 in receipts, you will need to pay $5,000 to your lender. Once the whole amount of loan has been paid off, you will acquire the total proceeds of all your credit card transactions.
Common Terms to Expect With a Cash Advance
In cash advance setting, the repayment structure isn’t determined by the time: it varies in line with the amount of your credit receipts. Generally, most cash advance lenders are paid back in full in 4-18 months. As for the factor rates, they can range from 1.14 to 1.42. The average retrieval rate can be somewhere between 5 and 15%.
This funding program can be very attractive to cash-strapped business owners. This is due to the fact that their approval rate is pretty high. Generally, 50% of small businesses are approved for this type of funding, however only 20% of businesses looking for a small business loan from a bank get the approval. Moreover, the approval process of this particular funding program is quick and easy! From start to end, the process of cash advance generally takes 1-2 days.
The required paperwork for cash advance for merchant is normally minimum, occasionally as little as four months of credit card statements, three months of bank statements and a copy of the business lease document. Furthermore, your personal credit score does not need to be high to qualify for this sort of business financing program.
Similarly, the small business owner is not responsible if the business goes bankrupt or insolvent. This is very different from many other types of business financing programs.
When lenders are evaluating a business’ appropriateness for getting a merchant cash advance, they make very detailed forecasts, based totally on previous statistical evidences and experience, regarding the previous loan repayments.
From these statistics, they can estimate an APR or interest rate. Should you pay off your debt in advance than expected, the APR will be higher. On the other hand, it will be lower if it takes longer to pay. No matter how you slice it though, merchant cash advances have excessive interest rates. This is why it is important to consider very cautiously before getting this sort of funding.