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What is a Cash Advance?
A cash advance is not really a loan. A cash advance is an upfront payment to you for your accounts receivables. There are two options, the funds can be advanced to you and withdrawn from your checking account or the funds can be advanced to you and withdrawn from your credit card processor. Merchant cash advances can be quick and easy ways to get a business cash advance with no need for security—even if you don’t have a good credit rating.
What Business Qualifies?
If your business has little or no collateral, limited business history, or a low credit rating, merchant cash advances could be the solution to your finance problems.
Merchant cash advance providers tend to have low eligibility standards, so that most small businesses shouldn’t have a problem qualifying for it.
For businesses that make a big portion of their revenue through credit card payments—if you own a restaurant or a retail store, for example—then you can opt to use a merchant cash advance as a short-term financing tool. It can help with working capital, inventory purchases, debt settlements, unexpected payments, and much more.
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How to request a Cash Advance?
Applying to a merchant cash advance is quite a fast and easy to follow process. Because merchant cash advances are paid back with your daily credit card sales, MCA companies will surely take a look at your credit card processing statements to make sure you have enough payments coming into the business. Some merchant cash advance companies will ask for your credit score and bank statements, too.
Merchant cash advance applications are almost always online, and applications can be approved the same day in which you have applied. Remember: fast cash is expensive cash, and thus MCA is no exception. A merchant cash advance application is fast and easy, but MCAs comes along with the highest cost of capital on the market.
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How it functions?
Every business could use some extra capital from time to time. But applying for loans takes time and energy that you might not be able to afford.
Plus, even after you send out an application, there are chances that you won’t even qualify.
At Best Option Funding, we pride ourselves on having a marketplace that can help out all forms and sorts of business owners. If you don’t have the time to wait for a typical loan or are afraid wouldn’t qualify for the same then, a merchant cash advance might be for you.
Merchant Cash Advance Loans: The Basics
How would you like a cash advance—approved and funded in just a day or two—with almost zero paperwork involved?
That’s what a merchant cash advance is, with one condition:
In return for that lump sum advance, you agree to pay the lender back with a percentage of your daily credit card sales. For this reason, MCAs typically makes sense for those businesses that get most of their revenue from credit card and debit card sales (but you don’t have to get all your revenue this way in order to qualify for a merchant cash advance).
How does it work in reality?
Well, with most types of MCAs, a provider will offer you a lump sum of cash in exchange for a slice of your daily credit card and debit card sales. Typically the MCA is paid back by deducting that percentage of your sales from your bank account—through ACH (Automated Clearing House) withdrawals. As merchant cash advance providers can just plug into your bank account or credit card processor, they can be easy-to-access, quick products.
While a merchant cash advance is definitely one of the faster financing options out there, it is also the most expensive loan on the market.
Merchant Cash Advances & Factor Rates
Merchant cash advance providers measure with their fees with a factor rate instead of an interest rate.
Ranging from 1.14 to 1.48 typically, a factor rate is what you multiply your loan amount by to figure out the total you’ll be owing.
Converted to APR, these rates often start at 15% but can go all the way up to triple digits.
Merchant cash advances can get so expensive for a few different reasons. The most important reason is that merchant cash advances tend to work for riskier borrowers—like those with lower credit scores or those with newer businesses. And this form of riskier lending options translates to higher rates and fees.
How Long Can It Take To Pay Off a Merchant Cash Advance?
The average repayment time frame for a merchant cash advance can range from 8 to 9 months.
But the term can even be as short as 4 months and as long as 18, depending on your business.
And the higher the fixed percentage of your credit card sales you’re paying the lender with, the shorter your repayment time—and the tighter will be your cash flow.
Is a Merchant Cash Advance The Correct Choice?
How do you know if a merchant cash advance will make sense?
On the one hand, paying off a loan with daily credit card sales can really bite into your cash flow more than you might expect.
On the other, you’ll actually repay a smaller amount of money during slower weeks and months—unlike with a term loan, where you’ll either make your payments on time or suffer the penalty late fees.
There are other reasons too as to why some borrowers might want to opt for a merchant cash advance rather than a more traditional business loan.
For one, merchant cash advances comes unsecured—meaning you don’t have to offer a valuable piece of collateral in exchange for the loan. This can be a benefit for some business owners who don’t want to put something like their personal home or financial assets on the line.
And finally, merchant cash advances are quick. Need cash this week? A merchant cash advance can probably be approved by that time.
These two advantages correlate with high costs, though. So when it comes down to it, it’s up to you to understand your business’s financials and needs. Just remember that a merchant cash advance is one of the most expensive financing options you could pick.
How Much Will a Merchant Cash Advance Cost?
We’ve said it over and over again: A merchant cash advance can be very expensive option. And based on the structure, taking on an MCA can really take a chunk out of your current cash flow.
But let’s look at how you can calculate the correct and accurate cost of a merchant cash advance.
A Calculated Example of Merchant Cash Advances
Say you’re advanced $20K with a factor rate of 1.18.
$20K multiplied by 1.18 is $23,600, which is what you’ll need repay with your daily credit card transactions.
At first glance, it might seem like you’re just paying an 18% interest rate—but looks can be deceiving.
You have to determine the correct cost of the merchant cash advance by its APR.
If your lender will be taking 15% of your future credit card sales and you’re estimating $25K a month in credit card transactions, you’d repay that advance in 189 days with daily payments of $125.
That’s an APR of 65.96%—which is quite a bit higher than it originally looked.
When is the Cost An Ideal Choice?
Merchant cash advances, while pretty fast and convenient, tend to be worth their price only if you’re confident you can repay them quickly and without much harm being done to your business’s cash flow.
Just be sure to shop around and see if you can qualify for other forms of loans before moving forward and opting for a merchant cash advance.