A merchant cash advance is a type of financing whereby a firm sells a percentage of its future revenue in return for immediate payment. This form of financing provides funds for your company to cater for operational expenses and to grow. Depending on the type of business, there are various ways to pay back the financing line.
Initially, companies used merchant cash advance to finance future credit card revenue. Hence, most customers were restaurants and retailers. The product has evolved such that cash advance firms are able to finance any future revenue, disregarding the repayment mode.
How do they Work?
Majority of cash advance firms see these transactions as the buying of future revenue as opposed to a loan. Finance firms review your sales of credit cards, bank statements, commercial sales, and other information to determine the amount of funds to offer. These reports offer them revenue performance information that allows them to project future sales potential.
Calculating the Funding Amount
The funding amount is calculated through a combination of your revenue and your account’s perceived risk. Majority of cash advance firms advance between 80% and 150% of the average monthly sales on the basis of these parameters. A return factor is used to multiply the funding offered to determine the repayment amount. The return factor ranges between 1.09 and 1.50 and the payback period can range from 3 months to 15 months. After approval of the financing, the amount is deposited to your account.
Paying Back the Funds
There are various ways to repay the funds. If your credit card sales were funded, your firm pays the finance firm back via a portion of its daily revenue. This percentage is referred to as the retrieval rate and can be between 8% and 13% of the daily revenue. Through the implementation of split processing with the credit card processor, the amount is paid back. Repayment takes place by letting the cash advance firm deduct the amount from your business bank account through the AHC system. Because of this, various cash advance firms are called AHC loans. The finance firms will debit your bank account either on a daily or a weekly basis.
Pros of Merchant Cash Advances
The advantage of cash advances is that they can be obtained in a few days. Additionally, it is easier to qualify for a cash advance as opposed to a business loan. If your business is in urgent need of financing, this option can be ideal.
Cons of Merchant Cash Advances
The major drawback of merchant cash advances is their high cost of financing. As a result, businesses should use it only when they can repay the amount and grow the business. Another con is that the value of cash advances is fixed like a term loan. In case your business has cash flow issues, fixed value financing is not the best option since it only provides a solution in the short-term. As a result, you might require to refinance the line a number of times. The best way to finance cash flow issues is to seek revolving credit like a line of credit.
Business owners can access SBA microloans of amounts up to $50,000. They are easier to obtain than bank loans and do not need good credit. They also come with management workshops and financial consulting, and this can be perfect for small companies.
These form of financing is used by companies that sell services and products to other firms. Since commercial sales are done on one or two month’s credit, this can result in cash-flow issues. You can factor your invoices to obtain immediate cash for paying operational costs.