A merchant cash advance traditionally offers an influx of capital based on a business’s expected credit card transactions over the course of a specified term. For example, if your business receives a $100,000 merchant cash advance with a 52-week term and a factor rate of 1.25, you would have to pay back $125,000 in credit card sales over the course of the next year.
Merchant cash advance repayment generally breaks down into weekly payments, said Randall Richards, director of business development at RFR Capital. According to Richards, cash advance companies often draw the payment directly from a business’s bank account rather than its merchant check over here account associated with credit card transactions.В
“Weekly payments would be based on sales and a multitude of factors,” Richards told . “Someone who is only doing $20,000 per month in sales won’t qualify for a $100,000 [advance]. The sales have to support the payment, or else the lender is at risk of losing money.”
Since merchant cash advances are based on sales, borrowers with poor credit can usually access them even when they can’t obtain a traditional loan. Of course, this flexibility means that merchant cash advances are more expensive than bank loans.
“Merchant cash advances are one of the alternatives today for people as they move down and become less and less creditworthy,” said James Cassel, co-founder and chairman of Cassel Salpeter & Co. “Merchant cash advances could carry the equivalent of 40% interest rates.”
Cassel clarified that merchant cash advances don’t carry an interest rate of their own, but the cost of a cash advance can be measured against the interest rates associated with a traditional loan. That is much higher than the interest rates on many bank loans, which might cost a business with great credit 2% to 5% of the loan’s principal value, Cassel said. Understanding your factor rate and whether you can negotiate it is useful in reducing the cost of a merchant cash advance.
The first requirement for most merchant cash advance lenders is that you accept credit card payments, since these transactions will be used to repay the loan. Not only do you need to accept credit card payments, you need to show that you garner enough credit card sales to pay back the loan in a timely manner.
- Your Social Security number
- Your business tax ID
- A couple months’ worth of credit card processing and bank statements
For example, in Richards’ hypothetical of a $100,000 merchant cash advance that costs a business $125,000 over a 52-week term, the interest rate equivalent would be 25%
Lenders will look at how long you have been in business, your monthly revenue and your credit score. Their goal is to assess whether you have a healthy, thriving business that will be able to pay them back. The approval depends on these documents showing that your company is profitable and capable of repaying its debt.
“You can qualify for a merchant cash advance by first applying through a reputable company,” said Xavier Epps, financial expert and CEO of XNE Financial Advising LLC. “Do your research first. Each company will have different requirements, but overall, these companies require less paperwork than traditional banks. The important thing is to make sure you can provide documentation for your business.”
Pros and cons of a merchant cash advance
Merchant cash advances can be useful tools for many businesses. Whether you are a seasonal business weathering the slow season or a business with cyclical sales, such as a manufacturer that makes most of its sales in Q4, merchant cash advances can offer support. However, for struggling businesses, relying on a merchant cash advance to stay afloat could be the beginning of a death spiral.