What is a Business Cash Advance?
A business cash advance, also known as merchant cash advance, provides a lump sum of money based of current sales as an advance off of future receivables. With a financing company providing this service, the repayment schedule is tailored to a business's revenue, offering flexible terms especially beneficial during fluctuating sales periods. Expanding on the access to capital through this method, the qualification requirements for a business cash advance are often less stringent compared to standard loans. As a flexible financing solution, companies receive cash upfront based on their expected future credit card sales receipts, making it suitable for businesses with variable sales volumes and those with lower credit scores who might benefit from alternatives like invoice factoring.
The basics of a business cash advance are appreciably straightforward. A business agrees to receive a lump sum, which is then repaid through a portion of its daily credit card income. This agreed percentage is deducted automatically—via auto debit for standard cash advances, or directly from future credit card sales for merchant cash advances. This repayment method, an integral part of the repayment schedule, continues until the full amount, inclusive of principal and any associated fees, is repaid.
For seasonal enterprises requiring improved cash flow management, or for those experiencing inconsistent sales, a merchant cash advance can be an ideal short-term financing solution. The repayment schedule adapts to the business's sales volume, enhancing flexibility. While they may be easily conflated due to their similarities, the distinction between a merchant cash advance and a traditional cash advance lies in the repayment process—the former being exclusively tied to credit card sales.
Despite sharing traits with short-term loans, a merchant cash advance stands apart as the obligation to repay ceases if the business's sales halt—unlike a loan. This feature underscores the importance of understanding the borrowing cost and the repayment terms spelled out in the financing company's merchant cash advance agreement. Additionally, businesses with a steady volume of credit card transactions typically find qualification requirements to be favorable when seeking this form of financing, with the seamless auto debit feature simplifying the repayment process.
How Does a Business Cash Advance Work?
A business cash advance (BCA) – also called a Purchase of Sales Agreement – is an advance amount based on the purchase of the merchant’s sales at a discount. This means that the business owner is responsible for paying back the specified fixed payback amount, which is higher than the amount that the lender advanced for the company.
What’s the difference between the advance amount and the payback amount? The factor rate. The factor rate is a fixed cost, meaning it’s not a principal cost or an interest cost. Instead, the advance is repaid by taking a fixed percentage of the deposits called the specified percentage.
Then, the payments are collected by an ACH payment which deducts from the bank account listed on the specified percentage of sales which is different than merchant cash advances. At the end of each month, reconciliation can occur. Reconciliation occurs if the fixed payments taken out of the account are more than the set future percentages of monthly sales, allowing the business to request a refund back to the merchant account for overpayment to ensure that the set specified percentage of sales matches the revenue volumes. Repayment continues until the payback is paid back in full.
Keep in mind that there is no time limit with advances since the fixed payback percentage doesn’t adhere to traditional business financing but to future revenue. Simply put, a BCA is not a typical loan option.
Business Cash Advance Product Overview
- Rate: Range from 1.09% up to 1.45% (not interest rates)
- Repayment Terms: There are no time limits; payments continue until paid in full based on specified percentage collection method and future revenue
- Origination Fees: Range from 0% to 3%
- Payment: Daily or Weekly fixed payment (can be adjusted monthly based on sales revenue
- Minimum Score Ranking: All history considered; ranging from poor to excellent
- Documentation Requirements: 1 page application and business bank account statements
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How a Merchant Cash Advance (MCA) Works off Credit Card Sales
Merchant Cash Advance, also known as a Purchase of Future Sales Agreement, operate very similarly to non credit processing cash advance, but the most significant difference is the repayment process, which is connected to the future credit card payments instead of overall sales. Merchant cash advance can be a good choice if your small business receives significant monthly credit card sales as revenue. An advance cost is not an interest rate, but a factor rate.
Merchant cash advance is not available to small businesses that don’t have a merchant credit card transactions account and don’t accept card sales from customers regularly. Merchant cash advances take a set percentage of daily credit card sales taken by the merchant cash advance provider at the time of batch until the advance is paid back in full. Small businesses find this valuable when they have fluctuating monthly credit card sales and don’t want to be locked into a fixed payment that could negatively impact cash flow or margins of profit if revenues decline or fluctuate.
A merchant cash advance isn’t categorized as business loans, Line of credit, but an advance made by selling a portion of the company’s credit card sales at a discount to a funder in exchange for money now. This product is offered by a merchant cash advance company and not a bank which is why you can consider a cash advance for business with bad credit too.
Merchant Cash Advance Product Overview
- Factor Rates: Ranges from 1.09% up to 1.45% (not interest rates)
- Repayment Terms: There are no time limits; payments continue until paid in full based on specified percentage collection method and future revenue
- Origination Fees: Range from 0% to 5%
- Payment: Percentage of future credit card revenue
- Minimum Score Ranking: All history considered; ranging from poor to excellent
- Time in Business: 6 months or more
- Documentation Requirements: 1 page application, business bank account statements & Merchant account processing statements
Benefits of Business Cash Advances and Merchant Cash Advances: The Pro's & Con's
Pro's
- Application Process- Lightning-fast approval to fulfill business needs. Funds deposited same day at funding, unlike a small business loan.
- Credit Qualifications- Funding for owners with less than perfect credit to bad credit.
- Flexible Repayment- Payments made primarily through credit card transactions (debit card sales ok as well) or want a fixed convenience daily or weekly payment, adjusted to monthly sales.
- No term limits- No set time to repay, based on future sales.
- Use of Fund Requirements- Access to working capital for any legitimate business reason accepted.
- No Personal Guarantee- Only business assets pledged, not personal assets, No personal guarantee required
- Payment Performance Reporting- Payment history not reported to personal credit bureau
Con's
- Expense- The cost of merchant cash advance is higher than traditional financing like business loans and business lines of credit. the APRs can be calculated quite high over 100% due to factor cost, payment frequency and the time estimated to repay. Since it's not a traditional loan the costs can be difficult to calculate when your looking at costs on an annualized basis.
- Payments- Payments are collected either daily or weekly which is more frequent than a monthly payment from traditional business financing. Payments are split directly from sales which can be a pro and a con depending on how your business operates. Couple the frequent payments and high cost of a business cash advance, affordability can become an issue.
- Early Payment- Since a business cash advance is not a loan and doesn't offer simple interest, paying off early provides little, if not any value or benefit. Some business cash advances offer early pay discount but it's not the same as an interest rate loan with amortization.
- Agreements- Business cash advance agreements are more complicated and harder to understand because they are actually purchase of future sales agreements and have terms that are not familiar or well understood by many business owners. Disclosure of APR's are not disclosed on agreements in many States because there is no actual APR in an advance, making it hard to compare offers and terms against traditional financing.
- Regulations- Business cash advances are offered by non-regulated entities, unlike traditional business loans which are often offered by banks and/or credit unions which are State or Federally regulated. This fact can lead to predatory lending if the business owner is not well versed and educated when it comes to getting business funding.
Many of our clients need cash fast. While it may be ideal in the long run to obtain a business loan, merchant cash advances are the absolute quickest financing option on the market. So, here are some reasons why business owner may want to consider this option.
Is a Merchant Cash Advance Right for Your Business?
Small Businesses can’t qualify for traditional small business loans. Not all small business borrowers find it easy to get approved for traditional loans due to stringent lender approval processes and stringent creditworthiness requirements. This is especially true for businesses experiencing growth or seasonal demand fluctuations that require flexible funding. For those who may not meet the stiff eligibility requirements imposed by traditional financing institutions, a merchant cash advance can be a lifeline, adjusting repayments in line with sales volumes. In particular, startup businesses may find merchant cash advances an attractive option as they are often more lenient and tailored to businesses with inconsistent sales patterns.
Merchant cash advance has low personal credit score requirements.
Funding application rejections from banks due to insufficient personal credit scores or unsatisfactory relationship with business credit bureaus can leave many business owners feeling stranded. At AdvancePoint Capital, we understand this dilemma and offer merchant cash advance options that consider the creditworthiness of a business differently. For various credit lenders, the emphasis placed on transactional revenue and potential for future sales can make this form of financing more accessible for companies. Our financing application process ensures that businesses operating for six months or longer can access necessary funds, even in cases where traditional measures of creditworthiness, like FICO scores, may be low.
Merchant cash advance can provide the capital needed fast.
Speed is of the essence when it comes to tackling cash flow challenges. Retailers and merchants often require quick infusions of capital due to the short-term nature of their business operations. A merchant cash advance offers a swift solution, providing rapid access to funds based on credit card sales or anticipated future sales—without the extended wait times often associated with lender approval through small business loans. For quick funding needs, online business loan options from providers who cater to startup businesses may expedite capital acquisition, often with minimal paperwork and a streamlined online process.
Best uses of Business Cash Advance
There are many reasons why businesses turn to a business cash advance. The uses are limitless as long as the funds are for a business purpose, like purchasing inventory at a bargain to boost sales potential. The following is a list of the most common uses of business cash advance:
The following is a list of the most common uses of business cash advance;
- Working Capital- Cash flow can be tight when revenue slows, yet expenses remain constant, which may necessitate advance funds.
- Purchase Equipment- When equipment financing leases or loans are not available, a cash advance can come in handy to acquire necessary equipment to run the business.
- Repairs-Businesses always have repairs to make to a facility or perhaps equipment breaks down and needs repair as well.
- Inventory- At times, purchasing inventory to meet customer demand necessitates additional funding, for which a business cash advance can be particularly useful.
- Marketing/Advertising- Effective marketing, like PPC campaigns, requires significant investment; cash advances can provide the crucial financing amount needed to amplify these efforts.
- Hiring Staff/Continuing Education- From recruiter fees to signing bonuses and online employment advertising, hiring staff can rack up expenses, just as providing further education and training does.
- Business Opportunities- To seize sudden opportunities that require quick funding, such as a time-sensitive bulk purchase or a strategic partnership agreement, a business cash advance can provide necessary liquidity.
With merchant cash advance repayments tied to credit card receipts, businesses can take advantage of a flexible repayment structure suited for variable sales volume.
What is the Difference Between a Merchant Cash Advance and Loans?
The main difference between a cash advance and a loan is that you don’t need to go through a formal application process and a credit check to access funding with an advance. Merchant cash advances are faster and easier. But they usually also involve more interest and additional fees.
As a small business owner, you have multiple options for different types of loans, including a secured loan, a short-term loan, or even personal loans. In all these cases, your lender deposits the amount in a bank account, and then you make monthly payments for a set term.
This process is straightforward. But, it can be time-consuming, especially when taking out a business loan.
With traditional loans like these, you accrue interest depending on the Annual Percentage Rate (APR) and pay the loan back in monthly installments. You can borrow money for both immediate needs and larger purchases, and both secured and unsecured loans are available.
Or you can get an advance. An advance is usually used as alternative financing by small businesses that need emergency business cash flow. They might not have time to wait for a short-term business loan from the bank. So instead, they can opt for a merchant cash advance or credit card cash advance.
Let’s dive into more specific differences between a small business loan and a merchant cash advance.
1) Method of Repayment
Credit card cash advances are an option if your card’s credit limit is high enough. However, you’ll want to repay your credit card issuer right away to avoid your card’s high-interest rate.
To repay a traditional loan, small business owners can make an automatic monthly payment from their bank accounts. You can also cover the payment amount through a check or wire transfer.
Merchant cash advances require you to pay the advance back through a percentage of your future credit card sales. You make daily or weekly payments to repay the debt through your credit card processor.
2) Repayment Period
When small or medium-sized businesses take out a new loan, they have a fixed amount of time to pay back the entire loan amount. In most cases, bank loan terms range from one to 10 years.
Advances do not have a fixed period. How long the repayment timeframe lasts depends on your revenue. Because the repayment amount is based on your daily credit card sales, you’ll pay back the advance faster when your revenue is high, slower when credit card sales drop.
3) Interest Rates
With business loans, you’ll pay less in interest and fees than you would with an advance.
A business or personal loan has a fixed or variable interest rate, and interest accrues on your principal. If you can afford to repay the loan early, you can pay even less in interest overall. Although, it’s important to note that some loans have penalties for early repayment.
Since advances are designed to act as quick funding or short-term financing, they are more expensive. You will pay a percentage of your daily or weekly revenues to cover the full amount due (your advance and the initial lump sum finance charge).
There’s no APR or periodic interest charge. The amount you owe is based on a factor, which usually ranges from 1.2 to 1.45 of the original advance. So, for example, if you get an advance of $18,000 at a factor of 1.2, you’d owe $21,600. At a factor of 1.5, you’d repay $27,000.
Because merchant cash advances do not charge interest, you can’t repay early and save interest. There is early pay discounts available for a merchant cash advance but you need the contact a merchant cash advance company for details.
4) Credit Scores
When you apply for a loan with any financial institution, they’ll check with the credit bureaus to ensure you have a good personal credit score. When you accept the loan, you’re making a personal guarantee you will pay the debt back, and defaulting can significantly impact your ability to qualify for future loans.
Advances don’t require you to have a good credit score to qualify, but defaulting will hurt your chances of future funding.
Frequently Asked Questions About Merchant Cash Advance
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How to Apply for a Business Cash Advance?
The business cash advance application process is fast, providing an alternative solution for those who require quick access to capital without the extensive vetting of traditional business banking protocols. Within one business day, you might be harnessing the merchant cash advance funding necessary to keep your enterprise afloat. Offering a more streamlined approach than conventional financing options that necessitate exhaustive documentation, a merchant cash advance application requires merely your latest business bank statements. This minimizes the hassle for business owners and aligns with the services provided by lenders like Credibly, who focus on making funding accessible to businesses with a variety of credit histories.
A modest business credit profile doesn't have to be a stumbling block, removing the stress about your business credit potentially thwarting your chances. The elimination of onerous paperwork and detailed financial history expedites the entire process — our user-friendly online application system allows for quick capital acquisition, eliminating the need for in-person meetings.
Here are the straightforward steps to apply for a business cash advance:
- Completing a succinct, one-page application
- Showcasing no less than six months of business establishment
- Presenting your most recent Merchant Credit Card Statements and/or Business Bank Statements
Upon submission, your application is moved into the fast lane; we aim to make an offer using a term sheet or disclosures to clarify merchant cash advance fees, payment schedules, and terms within merely 3 to 6 business hours.
When you're ready to accept an offer, finalizing your deal means signing on the dotted line of the merchant cash advance contract and handing over final documents like a driver's license, a voided check, or a bank letter to address any residual underwriting queries.
Now for the thrilling part: once all underwriting caveats are surmounted, the finance company will channel funds directly to your business bank account through wire or ACH transfer. As a result, you’ll find the repayment method that was set during pre-funding ensures a smooth reimbursement process, with manageable daily or weekly deductions from your sales transactions. Partnerships with business advisors can also guide you in making the most of your capital infusion.
By connecting with the right funding partners and leveraging the expertise of seasoned business advisors, navigating the road to financial support becomes less daunting. The journey to expand or sustain your business doesn’t have to be a solo venture.
