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A business cash advance, also known as a merchant cash advance, is an alternative to a traditional business loan. It's useful for entrepreneurs who want to buy new equipment, pay off debt, invest in branding opportunities, perform a renovation, buy out a partner, or make capital available to their business for other purposes. They can help you out when you need a quick influx of capital funds.
Business cash advances aren't really loans at all. Instead, you receive a lump sum payment from a cash advance provider in exchange for a share of your future sales. While simple in concept, there are some things you should be aware of before taking out a cash advance. This guide explains what you need to know about merchant cash advances, including how pricing works.
An Overview of the Business Cash Advance Process
Although obtaining a merchant cash advance doesn't require the large amount of documentation or collateral that securing a typical business loan does, you will still need to provide cash advance lenders with the following information:
- How long the business has operated: Typically, you must show a cash advance company that your business has been operating for a minimum of one year (and sometimes longer).
- Details of your monthly credit card transactions: Because your business will be paying back a cash advance out of its monthly credit card sales, you'll need to provide a credit card transaction history (usually a minimum of six months) that shows you have sufficient monthly credit revenue.
- Credit history: Cash advance businesses are not as selective as banks when it comes to credit checks, but some may still ask to review your personal credit history and that of your business. Prior bankruptcies or property liens will likely disqualify you for a cash advance, as will having a year or more remaining on a property lease and/or an existing agreement with another cash advance business. Keep in mind that even though an outstanding credit score isn't needed to get a cash advance, a stronger credit rating should help you secure larger advances and more favorable rates.
Upon filling out a simple application form and providing the above information to a business cash provider, it could take as little as one or two days for your merchant loan to be approved. Once it is, you can expect to have the cash advance in approximately 7 to 10 days.
Reasons to Use a Merchant Cash Advance
Despite high interest rates and short payback periods, business cash advances do provide benefits for companies that qualify, such as:
- It's easier to be approved for advance business cash than a traditional loan.
- Cash is available in as little as 72 hours.
- A cash advance is a purchase and sale of future income (not a loan), so it won't appear on your credit report.
- Business cash advances have no fixed payments and no due date. Rather, the amount you pay per month varies according to your cash flow, meaning you pay less in slower months, and can pay back the money quickly if your business does well.
- If you go out of business, the cash advance company takes the loss.
Business Cash Advance Rates Sample Costs
Determining a business cash advance rate depends on three factors:
- Advance amount: The amount of money you're receiving, as determined by your business' average credit card income over the last six months. Typically, the advance amount is 80% to 125% of your average monthly credit card sales.
- Factor rate: The fee charged by the provider. Due to the high risk involved in a merchant cash advance, the factor rate can be quite high (on average 20% to 45% of the advance amount, but businesses deemed risky could pay 50% to 75% or more).
- Daily retrieval rate: How much money is taken out of your daily credit card sales, usually between 15% and 25%. Providers will negotiate a rate that ensures you have enough remaining income to maintain your day to day business operations.
Using the above criteria, consider the following pricing example for a business cash advance of $50,000 with a 35% factor rate and a 25% daily retrieval rate.
- Factor rate: $17,500 ($50,000 x 35%)
- Total amount owed to provider: $67,500 ($50,000 + $17,500)
- Average daily credit card income: $5,000
- Daily retrieval rate: $1,250 ($5,000 x 25%)
- Time needed to repay advance: 54 days ($67,500 / $1,250)