The basics of a merchant cash advance:
When you get a merchant cash advance, a lump sum payment is given in exchange for a share of future credit card and debit card income.
The following is a typical example of a merchant cash advance for $20,000:
- In this example, the merchant receives $20,000 in exchange for $25,000 of future receipts.
- The cost of the merchant cash advance in this example is $5,000.
- The finance company collects a portion (generally 5-10%) from every credit card and debit card transaction until the entire $25,000 is collected.
The following are the five reasons why many businesses choose a merchant cash advance for their short-term financing needs.
Repayments are tailored to the business’s daily cash flow.
When you get a merchant cash advance, the financing company takes out a portion (usually around 5-10%) of your monthly credit and debit card transactions until the money and their fee is paid back. This percentage is fixed. As a result, if you have a month with lower credit and debit card transactions, your total payment is adjusted downward because it is the same percentage of a smaller amount of money.
Providers of merchant cash advances are less concerned about a company’s credit score
Another advantage when you get a merchant cash advance is that providers of this type of business funding give more weight to the volume of credit and debit card sales and are not as concerned about your credit score rating.
Collateral is not required to get funding.
Most loans will require, at the very least, a ten percent down payment. Many businesses either don’t have this money, or they can’t afford to divert this capital from covering their day-to-day operating costs. Since a merchant cash advance is not a loan, down payments are not required.
Providers of merchant cash advances are more relaxed about the length of time the business has been operating.
If you are applying for a conventional loan, most lenders will require that you’ve been in business for at least two years. Cash advance lenders, on the other hand, usually only require you to be in business for at least six months.
Merchant cash advances are processed more quickly than a typical loan.
When you apply for a loan, you are required to prepare a business plan containing financial statements. This can take several weeks or even months to accomplish. After that, it usually will take a minimum of sixty to ninety days to get your funding.
In contrast, companies, such as Newtek, can pre-qualify your business for a merchant cash advance for as much as $250,000 or as little as $5,000 usually within 24 hours. In most cases, you can get your money within seven business days.
The following are instances when a loan would be preferable to a merchant cash advance:
When a longer term of repayment is preferred
The typical term for a merchant cash advance ranges from 3 to 18 months.
An SBA or conventional business loan is more appropriate for long term financing.
When a company can qualify for a SBA or conventional business loan
An SBA and conventional commercial loan will always have better rates and terms compared to merchant cash advances.
It is important to realize that the percentage of each sale that you are paying to the merchant cash lender is not the rate you are paying! In the above example, if the term for the funding was one year, your rate would be 25% ($5,000/$20,000 X 100). If the term for the funding was six months, your rate would be 50%.
When you apply for this type of financing insist that the cash advance lender provide you with a projected annual percentage rate, or A.P.R., for your loan. This makes it much easier to compare the cash advance with other options such as an SBA loan, a conventional business loan, a business line of credit, card cash advances or equipment leasing.
When a company does not have substantial credit and debit card sales.
Companies that provide merchant cash advances are repaid by getting a percentage of the daily credit and debit sales directly from the processor that clears and settles payments. As a result, this form of financing is not appropriate for businesses whose customers pay in cash or with a check.
It is very important to use a reputable financing company when you go searching for a merchant cash advance.
Some companies charge excessive fees for this type of financing. One excellent source of a merchant cash advance is Newtek, “the small business authority.” Newtek is one of the leading providers of small business funding in the United States. In most cases, Newtek can usually pre-qualify a business for a merchant cash advance for as much as $250,000 or as little as $5,000 usually within 24 hours. Oftentimes, the money is made available within seven business days.