Does your business need an injection of funds to lift the income and cash flow? Merchant Cash Advance provides financial support to small business owners to expand business operations, purchase mandatory pieces of equipment, stock up on inventory, and to increase the working capital. Technically, a business cash advance doesn’t fall in the category of a loan it lands far away from the credit cards, traditional term loans, and factoring. So, before you choose business cash advance as you financing option, you must know how does a merchant cash advance work?
What it is and how does it work?
The primary conjecture behind a merchant cash advance or a business cash advance is to access funds on the security of future sales. The potential lender will take a certain percentage of money from your proceeding sales and or in case of other lenders; they debit your business account. The other traditional loans follow the conventional repayment method, where the borrower is obligated to make weekly or monthly scheduled payments. In this very aspect, a Merchant/Business Cash advance is different from a term loan. The repayment strategy of the said funding option is convenient for the lenders since they don’t have to wait around for the borrowers to clear off the debt. With full access to the borrower’s bank account, they don’t have to worry about borrower being a defaulter.
Moreover, instead of an interest rate, these loans carry a factor fee. Before you make a final settlement, it is necessary to know how lenders calculate factor fee and interest rate. They are entirely poles apart; by splitting financial charges by the maximum loan amount, you can calculate the factor rate. On the contrary, lenders calculate the interest rate multiple times keeping in mind the varying decline in the value of the capital assets – capital depreciation. Usually, factor rate ranges from 1.1 to 1.5, and your potential lenders finalize the rate after considering the following options:
- The niche of your business
- The numbers of years you have been running a business
- Annual revenue
- Average of monthly sales
- Consistent cash flow and stable income
These are all the factors the cash advance lenders consider before giving you a green signal. To make the factor rate clearer, let us build a hypothetical scenario, you run a construction business, and lately, you have thinking to increase workers and about business expansion but money isn’t allowing it to happen. So you decided to apply for a business cash advance and secured $250,000 with a factor rate of 1.25. In total you are obligated to pay $312,500 and lender will deduct $856 from your ongoing credit sales, on a daily basis for 12 months. Often times, merchant cash advance appear to be cheaper funding, so it is recommended to look over all the factor included. Merchant Cash Advance is an expensive funding option, but it comes with an extensive list of perks and deprivations.
Pros and Cons of Business Cash Advance
For short-term financing problems, this is one of the most suitable funding options, here are some of the reasons why:
- Funding in 24-48 hours
Depending on the loan amount, you can get the funds in 2-3 business days. Mostly a merchant cash advance ranged from $100,000 to $2 million. With advance less than $200,000, access is possible in 24 hours.
- Poor credit score, no issue!
There can be multiple reasons behind a poor credit score, and often, it is a hindrance. But not here, you can readily get a merchant cash advance if your credit score in around 500. As the factor rate is dependent on your creditworthiness, so a poor credit score means you have to pay more for a cash advance. All things considered, if you can improve your personal credit by paying off a higher factor fee, it is all worth it!
- Bare Minimum Documents
All you need to give us is banks’ statements going back to four months and a carefully filled loan application. In addition to this, a financial report to show your steady income and another document with your identity on it, such as a driver’s license.
- No collateral, no issue!
Merchant Cash Advance is an unsecured funding option, meaning if you don’t have any collateral to offer to your potential lender, this should be your pick! The lenders have access to your future credit sales, so the funding is secured somehow.
- Perfect funding option for seasonal businesses
Short financial outbreaks are inevitable in small seasonal businesses. An unexpected expense is right around the corner. Most of the merchant cash advance lenders are comfortable to lend money to these types of businesses because they are confident they will make enough money in the coming season.
Despite having these perks, Merchant Cash Advance has a few drawbacks as well, although they are nothing as compared to its useful features.
- Disruption in cash flows because of daily deduction from credit card sales.
- One of the most expensive funding option in the market.
If the terms, advantages and disadvantages of Merchant Cash Advance don’t settle well with you, then look at the alternative funding options:
- SBA Loans
- Lines of credit
- Equipment Financing
- Invoice Financing
At the end of the day, Merchant cash advance in one of the most convenient funding option for any sort of small business. If you think your dream business needs an infusion of cash flow, then sell your credit sales in advance and get instant funding – apply for a merchant/business cash advance. For more information and comparative analysis of the rest of the small business loans, follow us on Facebook (@Onlinecheck) and Twitter (@Onlinecheck). If you have any question, feel free to call us on our toll-free number at (833) 827-4412, our loyal and keen financial advisor will answer your every question and guide you throughout the way.