Sometimes your business might need extra money to keep its operations up and running. You may need funds for expansion or hiring, or you need to cover repairs and other maintenance needs at your business, for example. But you might not be willing to stick with a traditional loan, or you might not qualify for one. A merchant cash advance is one solution to consider when you need the money.
A merchant cash advance gives you the money you need in moments. You can use this option if you don’t qualify for a traditional loan. But a cash advance can also be a risky endeavor if you don’t plan things right.
How It Works
A merchant cash advance is an advance you can receive based on your credit card sales. A lender can review the credit card sales you deposit in your merchant account and identify how much you can qualify for based on your sales.
Here’s a look at how you can get a cash advance ready. In this situation, your business would be the “seller,” and the cash advance provider is the “buyer” for the deal:
1. You will provide the buyer details on your credit card revenue. You can highlight the totals and list the projected amounts you will raise in the future.
2. The buyer will calculate the totals you bring in and identify how much you can receive in your advance.
3. The buyer provides you the money you qualify for in the advance. The buyer will also list the terms surrounding how you will pay back the money and the rates associated with the deal.
4. You will pay a portion of your credit card sales back to the buyer. The portion will vary surrounding your deal and how long the advance will last. You will pay off the advance faster if you bring in more credit card sales.
Charges of Note
A merchant cash advance will entail a few charges. The most notable point about these charges is that an advance will not entail any interest fees:
1. A buyer will charge a fixed fee at the start.
The initial fee will entail multiplying the borrowing total by a factor rate. The rate can be worth a percentage of the total borrowing amount. The buyer will charge this fee instead of charging interest.
2. An origination fee may be necessary to cover efforts in establishing the advance. It can be worth a portion of the advance.
3. A closing fee will entail settling your advance after you pay off the entire amount. The fee may be a few percentage points of the advance.
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4. You could pay a fee if you take too long to cover the cash advance. Not all buyers will charge extra based on how long it takes to manage the total.
The total charges you’ll get out of a merchant cash advance will vary surrounding your provider and your risk level. A buyer may charge a higher factor rate on your advance if your business is seen as being too risky.
How Much Do You Send?
Merchant cash advances traditionally entail two types of payments:
1. Percentage of your credit card sales
Most merchant cash advances entail you paying a percentage of your card sales. A buyer can collect that percentage every day, week, or month depending on your agreement.
The total you would pay during each period will vary surrounding how much money you bring in from your customers through credit card payments. You will pay off your cash advance faster if you bring in more money.
2. Fixed daily withdrawals
You could also pay a fixed daily amount on your advance. The buyer can establish a payment plan based on how much you bring in every week or month. The buyer’s review will determine how much you will pay each day or week.
You’ll pay the same amount each time, which can be a problem if you struggle to bring in new credit card payments. You could have a tough time managing your cash flow if you don’t take in enough credit card receipts from your customers, as you will be stuck spending more of your income on your advance.
What Makes an Advance Useful?
A merchant cash advance is ideal for many reasons:
- You can get the money in advance in about a week on average. Some buyers can provide same-day funding.
- You won’t require physical collateral when getting an advance. An advance is unsecured, meaning you won’t risk losing assets if you cannot pay it off.
- Businesses that don’t have enough credit can apply for a merchant cash advance. You can use this if your business has been rejected for a traditional loan.
Concerns To Watch For With an Advance
A merchant cash advance sounds like a great idea, but there are a few pitfalls to notice:
- The rate you would spend on your advance may be significantly higher than what you’d get from a traditional loan.
- The rate will also be higher if you request more money. A buyer will charge a higher rate to offset the risk of providing more money in the advance.
- While you can pay off the advance early, you won’t get any benefits for doing so. You will still spend the same interest that was determined at the start of the advance.
- The contract could have some confusing or complex details.
- You could enter more debt if you cannot pay off the advance. Because you’re spending part of your daily sales on the advance, you might not have enough money to cover some of the other expenses for running your business.
Be careful when looking at a merchant cash advance. This solution can be helpful for many situations in your business, but it is not without risk. Be aware of how you’re going to handle your funds and that you know what you will be doing when applying for an advance.