Is a Merchant Cash Advance Right for Your Business?
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You are a small business owner and need capital now, and a cash advance from a merchant sounds like a good deal. Before you act, consider this: that quick money could really cost you dearly.
MCAs are known to have three-digit annual percentage rates – the total cost of a loan, including all fees. These costs, along with the daily repayment schedule, can lead to serious cash flow issues. In some cases, MCAs can lead to a debt trap, where it is virtually impossible to repay and you have to refinance into another – and yet another – MCA or file for bankruptcy.
This is why many consumer advocates and nonprofit lenders view MCAs as a financing option of last resort. Below, we outline the pros and cons of merchant cash advances to help you make the right financing choice.
A merchant cash advance provides alternative financing to a traditional small business loan. Merchant cash advance providers claim that their finance product is technically not a loan. An MCA supplier gives you an initial sum of money in exchange for a slice of your future sales.
A merchant cash advance has always been intended for businesses whose income comes primarily from the sale of credit and debit cards, such as restaurants or retail stores. Now, merchant cash advances are available to other businesses that are not very dependent on credit or debit card sales.
Merchant cash advance repayments can be structured in two ways.
You can get cash upfront in exchange for a portion of your future credit and debit card sales, or you can get cash upfront that is repaid by paying daily or weekly fixed debits to your bank. bank account, known as ACH, for automated clearing. House, withdrawals.
This option has become the most common type of cash advance for traders, according to Sean Murray, a former merchant cash advance broker and founder of trade magazine deBanked. They are called ACH Merchant Cash Advances and allow vendors to market to businesses that are not primarily related to credit and debit card sales.
Instead of making a fixed payment every month from a bank account over a set repayment period, with a merchant cash advance, you make daily or weekly payments, plus fees, until the advance is paid in full.
The amount you will pay in fees is determined by your ability to repay the merchant cash advance. The merchant’s cash advance provider determines a factor rate – typically ranging from 1.2 to 1.5 – based on their risk assessment. The higher the factor rate, the higher the fees you pay. You multiply the cash advance by the factor rate to get your total repayment amount. For example, a $ 50,000 advance with a factor rate of 1.4 represents a total repayment of $ 70,000, which includes a charge of $ 20,000.
Here’s a more detailed breakdown of how merchant cash advance refunds can be structured:
The merchant cash advance provider automatically deducts a percentage of your credit or debit card sales until the agreed amount has been fully refunded. Let’s say you need $ 50,000 to buy a new oven for your restaurant. You apply for and get approved for a $ 50,000 Merchant Cash Advance. The vendor assigned a factor rate of 1.4 on the contract, so you owe $ 70,000.
The repayment period generally ranges from three to 12 months; the higher your credit card sales, the faster you will repay the merchant cash advance.
In this case, suppose your merchant cash advance provider deducts 10% of your monthly credit card sales until you’ve paid off the $ 70,000, and your busy restaurant generates an average of $ 100,000. monthly credit card income. You would pay back $ 10,000 per month, with daily payments of $ 333 over a 30-day month. At this rate, you would repay the advance in the seventh month. But if your income fell to $ 70,000 per month, you wouldn’t repay the merchant cash advance in full until the 10th month, paying $ 233 per day.
As we explain below, how quickly you pay off your loan is a factor in determining your APR and can help push it down to triple digits.
The predetermined percentage of sales is an estimate based on your projected monthly income. Because your sales can fluctuate, the speed at which the loan is paid off may be longer or shorter than you expect, says David Goldin, CEO of Capify, a provider of cash advances to merchants, and president of Small Business. Finance Association, a trade association that represents companies providing cash advances to merchants. “Eighty percent of the time, it takes longer than the buyer thought. “
This type of agreement lists a daily or weekly payment to be withdrawn, based on an estimate of your monthly income. For example, a business with $ 100,000 in monthly revenue should $ 333 per day or $ 2,331 per week based on a 10% sales percentage.
Unlike the refund structure associated with credit or debit card sales, your payment does not fluctuate with your sales. This means that you will pay the same amount regardless of whether sales are going down or up.
Your annual percentage rate is the total cost of borrowing your merchant cash advance, including all fees and interest. This figure also depends on the time it takes you to repay the entire advance. Use the below to compare the cost of borrowing your merchant cash advance with that of other small business loans.
While merchant cash advances are a last resort financing option, they do have their advantages:
Still, MCAs are far from a perfect borrowing option, and you can get some of these benefits with other types of finance products.
Before turning to a merchant cash advance, small business owners should research alternatives. If the lack of collateral or a need for speed makes it difficult to obtain a traditional loan, online lenders offer with competitive APRs and repayment terms.
Business owners with poor personal credit can try online lenders and for funding. The top end of APRs for these lenders is 99%. But for borrowers with a narrow range of choices, they offer some advantages over MCAs.
OnDeck’s commercial term loans are a cheaper and more flexible alternative to MCAs. Unlike MCA providers, the company reports your payment activity to the business credit bureaus, giving you the ability to build solid , which can help you get a lower cost business loan in the future.
With access up to $ 500,000, repayment periods of up to three years, and repayments made daily or weekly, OnDeck loans are best used for expansion, such as purchasing equipment or lending. hiring new employees. In addition to meeting minimum qualifications, borrowers cannot be on the company’s list of restricted industries.
Cabbage is among the options for because the lender requires a minimum credit score of 560 to qualify. Kabbage offers $ 2,000 to $ 250,000 with shorter repayment terms than OnDeck. This is a better option for short-term working capital needs than for expansion.
You pay off each individual draw, with its own fee structure, monthly over six, 12 or 18 months. With APRs of 24% to 99%, Kabbage is expensive but still likely to be less expensive than an MCA.
For businesses with unpaid customer invoices, gives you 85% to 90% of the invoice amount up front and the rest when your customer pays, less fees. Borrowers can get up to $ 5 million in 24 hours at 15-68% APR.
Qualifying can be difficult. BlueVine requires a minimum personal credit score of 530 and an annual income of at least $ 100,000.