Merchant Cash Advance

Occasionally I am asked by small business owners about obtaining a merchant cash advance and whether it is right for them.  These are financial structures made by a finance company based on the amount of credit card processing a business does each month.

A merchant cash advance can be obtained in a very short period of time, usually 2 or 3 days. These are relatively short term loans for small amounts and made to small businesses that either have an immediate need for capital or can’t get a bank loan for one reason or another. 

It is important to know that these are short term financing structures and they typically carry a higher than normal rate of interest, mainly because of the short term nature of these loans and the lower credit scores of the borrowers. Contact me if you are considering a merchant cash advance and would like some advice or a referral. Its best to know all your options.

A merchant cash advance, is not classified as a loan, they are cash advances against your future credit card sales. I know it sounds like semantics, but they are not considered loans so the finance company does not need a bank license to finance these types of transactions, which by the way, have been in very high demand. Clearly there is a need. Billions have been funded through the merchant cash advance structure.

Merchant Cash Advance at a Glance

          ●  They do not rely on your credit rating;

          ●  The amount you receive is based on the volume of your monthly credit card sales;

        ●   They can close in just a few days;

        ●  The actual interest rate is much higher than a bank loan; and

          ●  They have a short payback period of about 6 to 18 months.

If you are seeking a small loan and you are in a hurry to close because of an urgent need for the funds, then you might consider looking at credit card processing loans. Some emergency uses for capital might be an equipment breakdown or a quick expansion requiring an immediate need for equipment or to hire an additional employee or two.

An immediate cash infusion, in a small amount, might be just what your business needs to keep customers happy and increase sales. After all, it’s all about increasing sales to grow your business. Sometimes accessing needed capital today is more important than having the capital a month or two later when the opportunity may have passed.

How much does a Merchant Cash Advance Cost?

Advance Amount. If you do about $25,000 per month in credit card processing sales you may be able to get a merchant cash advance of up to 1.5% of that amount, which would be equal to $37,500 in financing. Depending on the strength of your business and credit card monthly receipts this amount could be less.

Factor Rate. A “Factor Rate” is used to determine how much the merchant cash advance company will require you to pay them back. This is typically called a Factor Rate rather than a percentage or interest rate. A typical business person can expect to pay back about 30% of the advance amount through their monthly credit card sales. Industry ranges for factor rates are about 1.2 to 1.5, and if converted to an APR (annual percentage rate) would be in the range of 20% to 50%. This percentage could be even higher if you consider credit card processing loans are required to be paid off in six or nine months rather than 12 months. The actual percentage rate calculation depends on the Factor Rate and the number of months the merchant cash advance company sets as the payment schedule or payback period.

Monthly Payment Percentage or Holdback Rate. Some credit card processing lenders set a hold back percentage on the gross credit card processing the borrower does each month. That percentage is usually in the range of 10% to 20%. Other lenders will set a specific payment amount and a specific number of months for the loan to be paid off in full. This way the borrower will know exactly when the loan will be paid off. If the borrower is subject to seasonal fluctuation in their credit card revenue, it is better to go with a percentage each month rather than a fixed amount.   The more risk the lender feels they are assuming with the cash advance the less number of months they allow for payment of the loan in full. 

The more risk the lender feels they are assuming with the cash advance the less number of months they allow for payment of the capital in full. They may even reduce the amount of capital you are seeking and provide a short term six month cash advance. After successfully paying back the amount they can then repeat the cash advance as often as necessary. In this way they are reducing their risk and you have access to cash.

As an option to obtaining a merchant cash advance, OnDeck Capital offers term loans and lines of credit. They have a long history of financing businesses. Some of OnDeck Capitals requirements are: must be an existing business for 1 year or more, minimum credit score of 500, $100,000 revenue in the past 12 months and no bankruptcy in the past 2 years. If you would like to discuss comparison rates, please use the contact form on the right side of this page and I will get back to you promptly.

Based on the amount of your monthly credit card processing they will fund you between 1 and 1.5 times the amount of your monthly processing and take a certain percentage out of your processing each month. The length of the payback varies, but is usually between 6 and 12 months, so it is a short term loan.

I advise small business owners that they should first go to their local bank to seek a loan since they will usually be paying less. However, not all business owners can qualify for bank loans because of their credit scores and poor credit history.  Also, it takes longer to close a bank loan and sometimes there are document preparation fees and attorney’s fees associated with bank loans.

Even if you aren’t required to hire your own attorney or accountant to review the documents before your sign, many banks will have you pay a document preparation fee or bank attorney fee. The bank may require this for the work and preparation the bank needs to conduct before they can close and fund you the money you seek.

Banks are more conservative when giving out loans because they are subject to various regulatory requirements and loan guidelines. Banks typically have more overhead and larger operating budgets so you also have to keep that in mind when pricing any type of loan you may get from a bank.

Final Note on Obtaining a Merchant Cash Advance

Before you decide on whether or not to look at credit card processing loans, be sure you have all the facts and understand exactly what you are signing. Read the fine print and do the math. As long as you understand exactly what you are signing then the decision is up to you. Billions of dollars have been funded to small businesses with these types of loans so you are not alone. These merchant cash advances have a very specific purpose and might be just what you need to solve your immediate need for cash. Remember the most important aspects of these types of loans shown above.

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