01/ What is a Merchant Cash Advance?
Merchant Cash Advance is a quick, easy way to get a business cash advance with no need of collateral,
even if you have bad credit.
02/ How Merchant Cash Advances Work
With this type of financing, you get a cash advance – usually approved and funded in just 24 to 48 hours
– with very little paperwork involved. In turn, you agree to pay back the advance, plus a fee, by letting the
funding provider take a portion of your credit card sales each day until the entire amount has been repaid.
While a merchant cash advance can certainly be a quick way to get cash, it can also be quite expensive. Fees
can range from 15% to 80% APR of the amount financed. However, merchant cash advance providers measure
their fees as a factor rate, which can range from 1.14 to 1.48. The advance amount you receive is multiplied by
that factor rate to determine the total amount you’ll pay back. You’ll pay this back by giving the funding provider
a fixed percentage of your credit card revenues each day until the loan has been settled, meaning you actually
repay a lower amount of money during slower months. Average repayment time frames are 8 to 9 months, but
can be as short as 4 months and as long as 18 months. The higher the fixed percentage of your credit card sales
you’ll share, the shorter the repayment time frame will be.
03/ Cost
Let’s take a look at how you can calculate the true cost of a merchant cash advance. You are advanced $20,000.
The funding provider quotes you a factor rate of 1.14. So, this means you will be expected to pay back $22,800.
At first glance, it might seem like you are paying 14% interest rate. But, the real number you want to look at here
is APR. If the funding provider is taking 10% of all your future credit card sales, and you project to have $25,000 a
month in credit card sales, your APR would actually be 35.65% and you would repay the advance in 274 days with
daily payments of $83.33.
04/ Who Qualifies
If you don’t qualify for financing at a traditional bank or financial institution, MCAs could be an option.
Merchant cash advances are a good solution if you have little or no collateral, limited business history,
or a poor credit rating.
If you receive a large portion of your revenues through credit card payments (for example, restaurants
and retail stores), you can use a merchant cash advance as a short-term financing tool to help with cash
flow, purchase inventory, pay other debts, meet unexpected expenses, and more.