10 things you need to know about merchant cash advances

You may be a business owner with a struggling business and are probably looking for options to save your company from going down. The merchant cash advance option may have come to your mind but probably don’t have enough information. This article is dedicated to giving you useful information and taking you through a couple of important points.

1.  What is a merchant cash advance?

Merchant cash advance

Merchant cash advance

Merchant cash advance financing is a financing option that involves the loan of a certain amount of money into a business by merchant cash advance providers in exchange for future credit card and/or debit card sales. It is a financial plan that small businesses take up.

Merchant cash advances help them get quick cash which their businesses need. In exchange, they sell a part of their future sales to the merchant cash provider. This means that if the business makes a sale, the sale is divided between the business and the provider company.

    The terms are agreed between the two parties but the cut is usually between 10-25% of the credit card sale going to the company while the remaining goes to the company. This becomes an easy way for the business to inject cash flow into its operation and then pay back as they continue conducting business.

2. Functions of merchant cash advances

A merchant cash advance is used by the business for all sorts of reasons. The business may decide to use the cash to pay their employees or repay a debt. Other businesses may use the cash advance for advertisements or fund a promotion campaign. Other uses may include the production of more inventory and stocking up products. 

The merchant cash advance is a helping hand for business owners during difficult financial situations. The cash advance becomes a quick solution for these problems.

3. Merchant cash advance is NOT a loan

Merchant cash advance is not a type of a loan. It is described as an exchange of cash the future credit card or debit card sales. It is not considered as a loan and thus treated differently. That is why merchant cash advance providers say that they are not regulated by the loan and interest legislations that have been put in place.

Hence, the interest rates could go higher than you are normally used to. Another difference is that since it is not a loan, the interest rates are not calculated by the annual percentage rate. They are calculated according to the factor rate of the business.

4.   Fast approval

Fast approval

Fast approval

Merchant cash advance is processed within a short period of time. With all necessary documentations and credentials, a merchant cash advance could be approved within 24 hours. The deposition of the money into the business account may take up to a week. This is considered very fast compared to traditional loans which have to go through a series of processes before they approve your loan. A merchant cash advance gives you the fast cash for your business. Thus, it is very attractive to small business owners.

5. Pros of the merchant cash advance

Pros of merchant cash advances

Pros of merchant cash advances

A merchant cash advance has many advantages that attract a lot of people. They include the approval time z and the credential factor, among others

  •  A merchant cash advance does not require many credentials to apply. It’s all about the business and not about the individual. Thus there is nowhere the credit score of the proprietor of the business is in question. The plan solely deals with the business and not the owner.
  • The approval time for a merchant cash advance is just lessee than most other loans in the market. It takes a minimum one week to get the merchant cash advance for your business. It’s why merchant cash advances have become so popular.

6. Cons of merchant cash advances

The plan definitely comes with a few drawbacks which you have to be careful of. The drawbacks mostly affect the interest rate of this plan. The plan doesn’t have an annual percentage rate as it is not classified as a loan. It all depends on the factor rates. This means the rate of interest cannot be controlled. There is an important aspect which you may need to know.

The percentage cut that is paid to the company for every sale is not the same as the interest rate. They are two different things and the charges are different band have to be paid. This may cause confusion for the business owner and thus cause frictions in the future.

7.  Other factors

This sort of financial plan is has a special characteristic. The amount of money from sales that are going to the company varies. This means you cannot plan for the money that is going to be paid from your business to the company. This plays a con card in this case.

However, this characteristic has a flip side. This is because since the cash is not specified, it means that you are not affected as a business when it comes to the low season of your company. There is no specific amount of cash that is specified that your business has to earn each month. Thus, the merchant cash advance company will get paid when you make sales. This relieves your business from the pressure of having to attain a certain amount of sale each month.  

8. Company specifications

 

different companies will come up with different offers

different companies will come up with different offers

In order to attract businesses into their plans, different companies will come up with different offers for your businesses. Thus, you will have to a lot of companies offering merchant cash advances but are customized in different ways to suit different businesses. The key is always to take the plan that works well for your company. It’s all about looking at works with your budget and your sales projections.

9. No collateral involved

Merchant cash advance companies don’t need a collateral as this is not a loan. It is an exchange of future sales for a merchant cash advance. This, collateral becomes irrelevant. It’s all about the agreement put in place when the application of the MCA  was done.

10. Bottomline

It’s all about choosing what works for your business. This plan is very attractive as it’s very simple to understand. However, it has the downside of having very high- interest rates. However, if you can couple with them it’s a plan that could go a long way in making your business a success. It’s all about perspective; what you make of the plan.

Merchant cash advance: what it’s all about

Sometimes, your business may experience cash flow issues. It could be cash needed to pay your employees and suppliers, get new inventory or expand the business. As a business person, you want a fast solution, a way to pump money into your business quickly.

Time is money in this case and so every minute counts. Traditional loans may take a long time to process, especially if we are talking about a large sum of money. Background checks will be carried out, then they will check your credit score and ask for collateral for the loan. The process could be too long and complex. Thus, you will look for better solutions that are fast and convenient for your business and safe for yourself. This is where merchant cash advance comes in.

Merchant cash advance is a purchase of a fixed dollar amount of your business’ future credit card or debit card sales receivables. What’s a Merchant Cash Advance? Let’s break this down for better understanding.

What is a merchant cash advance

What is a merchant cash advance?

What is a merchant cash advance?

What is merchant cash advance? Merchant cash advance started long ago, but it was structured differently. It would involve a large sum of cash payments that would be done to a business by a merchant cash advance company, in exchange they would get an agreed upon percentage of future credit card or debit card sales.

This means that repayment would be done slowly. You have to realize that a merchant cash advance is not categorized as a loan.

Times have changed and now the merchant cash advances have been adjusted structurally to accommodate all sorts of business, big or small. Right now, the definition of a merchant cash advance is as follows: a merchant cash advance is an exchange of a specific amount of payment done to a business in exchange for future credit card and/or debit card sales.

The payments are done in small portions over a short period of time as specified between the business and merchant cash advance company. This description has helped to bring the diversification of the business that looks for this financial plan as an option for their business.

The structural concept

The structural concept

The structural concept

Merchant cash advances are about the exchange of future credit card sales and/or debit card for instant cash. Basically, the owner of the business gets the cash injection and then as the business makes money the company that bought the future sales gets back its money slowly.

Let’s see a simple example. A business decides to take out a merchant cash advance worth about $30000 in exchange for about $35000 future sales. As the business goes on making money, it has to pay between 10-25% of every credit card or debit card sale it makes to the lending company.

Payment is structured according to the agreement between the borrower and the lender. The business may decide to make a payment by the end of each business day. This means that calculations are done, and then the cut is made and sent to the merchant cash advance company.

However, some businesses have adopted the technologically advanced payment mode. This involves partnering with payment processors. Thus, payment is done automatically and a percentage of the daily sales is transferred automatically to the merchant advance company.

The fact that this financing option plan is not described and characterized as a loan means that the providers of this service disregard any laws and legislations imposed on loans everywhere, citing the reason that the laws do not touch their financial modification. This ultimately means that they can set interests up to anywhere they deem profitable enough for themselves. After all, there is very little in place to stop them.

However, they are quite reasonable as each deal they make all depends on the structure, sales and projection of a business. It’s all about what comes out of a business a certain time and how fast they will get their money. Instead of using the annual percentage rate to calculate interest, this plan uses specific business factor rates to calculate how much interest the company pays back.

Repayment options of merchant cash advance

Repayment options of merchant cash advance

Repayment options of merchant cash advance

This plan is mostly used by small business enterprises and companies that technically cannot qualify for a traditional loan. It is important to state that a merchant cash advance is always more expensive than getting a traditional bank loan. However, the business that uses like its convenience. The fact that the merchant cash advance company don’t go looking at the borrowing company’s credit score makes merchant cash advances even more attractive.

  When it comes to repayments, the merchant cash advance companies want to give their customers enough options to let them repay conveniently. The repaying options are:

  •         Slip withdrawal
  •         Lockbox
  •         ACH withholding

Slip withdrawal

This is the most popular way of repayment. Typically, this mode of repayment involves the automatic slip of sales. This means that if a credit card sale is made at the business which borrows the merchant cash advance, the payment is split such that 10-25% of the total sales go to the company while the rest remains in the business. The method is convenient for all types of businesses. Both parties get their money automatically with no conflicts or delays.

Lock box

This mode of repayment is also known as the trust bank account withholding. This entails the deposition of all sales made by the company into a bank account that is controlled by the cash merchant advance company. Then according to the agreed terms, the company sends the business’s portion of the sales through wire transfer into its deposit account. This option is the least preferred because it is prone to all sorts of delays.

ACH withholding

This mode is divided into two; it will either depend on if the agreement is “for sale” or “as loan”. As a sale, the company gets the credit card sales information and then deducts its portion for itself. When structured as a loan, the company will not regard if the business has made a sale. The company deducts a fixed amount of cash daily.