What is a Merchant Cash Advance?
- March 2, 2021
- Written by : Carl Eschenburg
Itâ€™s very common for business owners, especially those operating a start-up, to need funding from time to time.
From everyday expenses to new equipment, payroll, or other, costs begin to add up. Owners must stay on top of these expenses to avoid getting behind and allowing them to pile up; if the business cannot afford to pay every expense as it comes through, the common solution is to seek funding.
In this situation we suggest a merchant cash advance to give you access to immediate working capital. As our experts say, a fast cash advance could be the difference between staying in business and shutting your doors for good.
How does a Merchant Cash Advance work?
At REIL Capital, we define a merchant cash advance as the quickest and easiest financing solution for small businesses. This is a common hero for many companies in need of immediate working capital, and owners with poor credit.
A merchant cash advance allows business owners to gain working capital as soon as possible, spend freely with or without a financial plan, and pay back the amount owed using a simple credit card process.
Companies tend to receive a lump sum usually between 80-120% of your monthly revenue. To pay this money back, you will be charged a percentage of your daily credit card sales or a fixed remittance from your business bank account.
What is a factor rate?
A factor rate is a number or percentage, that will determine how much you will have to pay back on your business loan. Repayment is sourced from a credit card or bank account in which you use daily for or with the business; the more you sell on a given day, the more you will repay as your factor rate. Keep in mind, however, the factor rate you will pay back on the loan will stay based on the original amount, not the amount remaining.
To calculate this, multiple the amount of capital borrowed by your factor rate. For example, if you borrowed $20,000 with a 1.2-factor rate for a 12-month term, the total amount to repay would be $24,000.
What are the advantages of a merchant cash advance?
Advantages of a merchant cash advance include:
- You donâ€™t have to have great credit. Lenders simply want to see a certain amount in daily and monthly sales for you to qualify. As long as you can prove you have â€˜Xâ€™ amount coming in, you will more than likely be accepted for a merchant cash advance.
- You can receive funding almost instantly. After you are accepted, the next step is to determine what the repayment process details. Funds are sent immediately after.
- There is no question of how you will spend the money, only how much you plan to pay back monthly. This is different than most loan opportunities because most of the time lenders expect or require a detailed financial plan. You have the freedom to spend how youâ€™d like.
- As For a Financial explains, â€œA merchant cash advance isnâ€™t a loan. You donâ€™t owe set monthly payments and wonâ€™t be given a set repayment term. Instead, youâ€™re agreeing to a lump sum of cash in exchange for a portion of your businessâ€™s future credit card sales.â€
What are the disadvantages of a merchant cash advance?
Disadvantages of a merchant cash advance according to Nav include:
- Being a small business, making a daily payment to your lender can be quite a commitment. Consider whether or not your daily cash flow would suffer if you had to make those payments.
- You must own a credit card or have a business bank account. This isnâ€™t a stipulation that business owners canâ€™t quickly change, however.
- Unfortunately, merchant cash advances do not help your credit. Although you would be making monthly payments, you will not be building your score.
FAQ about merchant cash advances
What are the qualifications for merchant cash advances?
Qualifications for a merchant cash advance include the following:
- Must have been in business for at least 6 months
- Must have a minimum credit score of 480+
- Must have $8,000 or more in monthly revenue
Whatâ€™s the difference between a factor rate and an interest rate?
Factor rates and interest rates have one major difference: principal. Instead of paying a percentage on the amount remaining as you would with an interest rate, a factor rate means you will be paying a percentage on the principal in which the loan originated.
Do cash advances hurt your credit score?
A merchant cash advance will not affect your credit score, however, non-repayment of your loan can result in a lower credit score. This happens due to an inability to pay your credit card monthly charges, or those set by your lender. Just with any credit or debit card, it is up to the user to make payments on time and in full.
How do I start a merchant cash advance business?
Any entrepreneur has the opportunity to start their own business, but as with the majority of start-ups, it requires funding to some degree. To start a merchant cash advance business, youâ€™ll want to find a qualified lender and apply for funding by completing an application and providing documentation such as bank statements. Once you are approved, payment details will be determined and funds will follow shortly after.
Is merchant cash advance right for your business?
A merchant cash advance is the right loan for your business if you need immediate working capital and are in the position to pay it back based on your future credit card sales. If you believe your business is established and profitable or will be post-loan, then cash advances are a great option for you; you do not have to have great credit to be accepted.
If you are in need of working capital, an easy approval process, and quick access to funds, we encourage you to give us a call or apply online for a merchant cash advance. This could be exactly what your business needs to overcome the next inventory haul, equipment reorders, payroll period, or more.