A merchant cash advance is a type of funding that allows businesses to borrow money against future sales. The loan is repaid with a percentage of the business’s daily credit card sales, making it a convenient option for businesses that process a lot of credit card transactions.
Merchant cash advances can be used for a variety of purposes, such as funding inventory, expanding the business, or covering unexpected expenses. They are a popular option for businesses that may not qualify for traditional bank loans, and they can be approved quickly since they are based on future sales instead of credit history.
To qualify for a merchant cash advance, businesses typically need to have been in operation for at least six months and process a minimum of $5,000 in credit card sales per month. The amount that can be borrowed depends on the business’s monthly sales, and the repayment terms vary depending on the lender.
If you’re considering a merchant cash advance for your business, it’s important to compare offers from multiple lenders to make sure you’re getting the best deal. Be sure to read the fine print and understand the repayment terms before signing any agreements.
How does Merchant Cash Advance Work?
The basic idea behind merchant cash advance is simple:
A business sells a future stream of credit card receivables to an investor in exchange for a lump sum of cash today. The purchase price is based on a multiple of the monthly credit card volume, typically 1.15 to 1.40. In other words, for every $1,000 in monthly credit card sales, the business would receive $1,150 to $1,400 today.
The cash advance is repaid over time through a daily or weekly automatic deduction from the business’s bank account, equal to a fixed percentage of that day or week’s credit card receivables (from 2.5% to 10%). The repayment percentage is fixed, so the amount of money deducted each day or week will increase as credit card sales increase.
For example, let’s say a business has monthly credit card sales of $100,000 and takes out a merchant cash advance for $115,000 (1.15 x $100,000). The repayment percentage is 5%, so the business would need to repay $5,000 each month (5% x $100,000). If credit card sales increase to $120,000 the following month, the business would need to repay $6,000 that month (5% x $120,000).
The repayment schedule is flexible, so if credit card sales decrease, the business would simply repay less that month. This is one of the key advantages of merchant cash advance – it’s a form of funding that can fluctuate with your sales, which is helpful for businesses with seasonal or cyclical sales patterns.
Another advantage of merchant cash advance is that it’s easy to qualify for. Since the funding is based on future sales, businesses with bad credit can still qualify. In fact, most merchant cash advance providers don’t even consider personal credit scores when making funding decisions.
The downside of merchant cash advance is that it can be expensive. The fees are typically calculated as a multiple of the advance, so a business that takes out a $100,000 cash advance could end up paying back $115,000 to $140,000.
To compare the cost of merchant cash advance to other types of funding, it’s helpful to look at the “effective rate”, which takes into account the fees as well as the repayment schedule. For example, a merchant cash advance with an effective rate of 30% would be more expensive than a business loan with an interest rate of 10%, even if the interest rate on the loan is higher.
The other key downside of merchant cash advance is that it’s not easy to get out of. Once you’ve signed the agreement, you’re committed to making the repayments – even if sales decline or the business struggles.
For these reasons, merchant cash advance is best suited for businesses that are confident they can increase sales in the near future and can afford the high cost of funding.