Definition of a Business Cash Advance | Small business
If you don’t have other alternatives for providing a line of credit for your business, a business cash advance may be your solution. Business cash advances are like corporate payday loans – easy to get but with high interest rates, according to BusinessWeek. Despite the high costs, cash advances to businesses are a booming industry as of 2010.
According to Business Finance, business cash advances, also known as merchant cash advances and accounts receivable factoring, give businesses money in return for reduced future credit card sales. Merchant cash advance companies emphasize that this is not a loan because the customer “buys” the money with a business asset.
In an early business sale, the buyer must return the principal sum and a fee typically set at about 25 percent of the principal, according to Inc.com. The company generally has one year to repay the advance plus costs. Each week, the seller receives a transfer from the buyer’s merchant account. The payment schedule therefore depends in part on the weekly performance of the buyer’s business.
A business doesn’t need to go through a loan application to get a merchant cash advance and receives the money in a week or less, according to BusinessWeek. According to the Dallas Morning News, many cash advance companies will lend to people with very low FICO scores, sometimes in the 400s. Since repayment is dependent on sales, companies often have an easier time meeting their obligations. than with a business loan.
One of the most expensive ways to finance a business is cash advances. Since cash advances are typically repaid within one year, the effective annual percentage rate on purchase often reaches triple digits. At such high interest rates, the business owner may find it difficult to repay the advance. In addition, some companies obtain advances without sufficiently considering the terms of the advance, which means that the advance could cost more than they can reasonably handle.
Some critics of corporate cash advances, such as Sanford Brown, sales manager at Heartland Payment Systems, based in Princeton, New Jersey, see them as predatory loans. Most states put a cap on the amount of interest a lender can charge, but cash advance companies bypass usury laws because they technically don’t have a standard repayment schedule.
In 2004, Judge Consuelo B. Marshall of the U.S. District Court for the Central District of California ruled in favor of business owners in a case against Rewards Network, saying that cash advances can be interpreted as loans if the company cash advance refers to it as one. The plaintiff, Anat Levy & Associates, claimed that Rewards Network was in fact an unlicensed lender that offered loans that violated usury laws. Rewards Network customers paid an effective interest rate of 419%, while California allows unlicensed providers to charge a maximum APR of 10%.
Biography of the writer
Russell Huebsch has written freelance articles covering a range of topics from basketball to politics in print and online publications. He graduated from Baylor University in 2009 with a Bachelor of Arts in Political Science.