Every business goes through periods where cash flow is stretched due to reduced sales, unexpected bills, or external factors. It’s how you manage cash flow gaps that ensures the long term profitability of the business. According to the Australian Securities & Investments Commission, inadequate cash flow is the cause of failure for 51.2% of insolvent companies.
Many businesses seek external funding to help them manage cash flow gaps. Merchant cash advances are a finance option for companies seeking a fast cash flow boost without taking on long-term debt or using property and business assets as collateral.
What Is a Merchant Cash Advance?
A merchant cash advance is a finance solution that enables a business to access immediate funding and pay back the sum owed through a percentage of future card payment revenue. The borrower receives a lump sum as an advance on future card payments. A factoring fee is added to the total amount the borrower needs to repay.
The repayments of a merchant cash advance are based on future sales revenue. The lender pays a percentage of sales revenue deducted from each payment received on the borrower’s card terminal. A traditional business loan involves regular payments to the lender to repay the principal and interest and has an extended and complex approval process. In contrast, a merchant cash advance is a flexible and fast way to improve cash flow.
How Do Merchant Cash Advances work?
A merchant cash advance provider will review up to six months of your card processing statements to determine the amount you can borrow. You can receive an advance of up to 70% no credit check payday loans Munford TN of the average monthly card sales revenue. Because the lender doesn’t need to adhere to strict lending criteria, they can approve funding much faster than a traditional loan provider or bank.
The advance and factoring fee are repaid automatically when your business receives a card payment. When a customer pays via card, a percentage of the payment is paid directly to the lender. You repay the advance every day that you process customer payments on your card terminals.
The cost of a merchant cash advance is agreed upfront and doesn’t accrue interest like a traditional business loan. The advance and factoring fee are repaid as your business processes card payments.
Merchant cash advance terms can vary according to the amount borrowed. A short-term advance can be repaid over a period of 90 days. Once the advance has been processed and you have received funding, the repayment terms begin.
The cost of a merchant cash advance is determined by the factor rate and can range from 1.1 to 1.5. For example, a merchant cash advance of $20,000 with a factor rate of 1.4 would result in a final repayment of $28,000.
Do Merchant Cash Advances Impact Your Credit Rating?
While merchant cash advance providers are much more flexible and willing to lend than traditional loan providers, they will still perform a credit check before approving an application for an advance. However, this “soft” check will not usually impact your credit score.
Which Types of Businesses Can Use a Merchant Cash Advance?
A merchant cash advance is a finance solution suitable for businesses that process a high volume of card payments, including brick and mortar stores and e-commerce businesses. Any company that processes a large number of sales by card can benefit from a merchant cash advance.
Pros and Cons of a Merchant Cash Advance
The flexibility and fast access to funding make merchant cash advances appealing to many businesses. But they do have disadvantages, and your business may be better suited to an alternative finance solution. To help you decide whether this type of finance is right for you, let’s assess the advantages and disadvantages of a merchant cash advance.