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. How? A cash advance works by enabling a business to sell a portion of its projected sales. This is not considered like other small business loans or lines of credit, but an alternative short-term business funding option.
The basics of merchant cash advances are reasonably straightforward. In exchange for a lump sum of merchant cash, a business will offer a percentage of its daily sales income. This percentage is collected directly by ACH payment for cash advance and for merchant cash advance from merchant processor future credit card sales. This process continues until the balance is paid. If you are a seasonal company that needs better cash flow control, merchant cash advance is perfect for your business needs. Companies that have continually fluctuating sales and a merchant cash advance is an ideal solution for short-term, seasonal, or sale initiatives.
The terms, percentage options, score requirements, and overall facets of a cash advance are very similar to an Merchant Cash Advance. So, you’ll likely see us refer to these two interchangeably. The biggest difference is how you would repay the advance, with a merchant cash advance relying on a percentage of future daily credit card receivables while a cash advance is broader, relying on overall sales. However, they are one and the same accept for payment retrieval. Although merchant advance has some features of a short term loan, it is not, because if the sales cease of the business then you are no longer obligated to repay any remaining balance unlike a loan. This product is not available by merchant cash advance companies to startup businesses.
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.
Business owners know just how difficult it is to be eligible for traditional bank loans or other traditional loan institutions. Established businesses that are growing or trying to keep up with seasonal spikes need a way to fund there business. If not, their company could suffer immensely or tank altogether which is where an advance can help as the payments fluctuate to current sales volumes.
Merchant cash advance has low personal credit score requirements.
Many business owners try first with banks for a business loan. However, eventually, they run into qualifications such as poor personal credit and appropriate business credit bureaus. Spending all of this time and effort just to be denied for poor credit history can be devastating. We have you covered. As long as a business has been established for six months or more, AdvancePoint Capital will take care of your needs even with poor credit scores.
Merchant cash advance can provide the capital needed fast.
As we’ve mentioned, a cash advance is the fastest option that a business can get for cash flow problems. Many retailers and merchants need short-term due to the nature of their business model. A merchant cash advance enables businesses to receive fast money from funders without making them wait around or jump through hoops with a small business loan. Whether it’s through credit card payments or overall future sales, you can get a cash advance fast.
Best uses of Business Cash Advance
There are many reasons why businesses turn to a business cash advance. The uses are limitless as there are not restrictions as long as the funds are for a business purpose.
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.
- 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- Sometimes business funding is necessary to fund inventory & supply so the business can meet customer demand.
- Marketing/Advertising- Advertising can be expensive with PPC with Google and other online marketing methods.
- Hiring Staff/Continuing Education- Hiring staff can be expensive whether your using recruiters, if you need to fund signing bonuses, or advertise employment online. Providing training and continuing education can also be a significant expense.
- Business Opportunities- Sometimes great business opportunities can come a businesses way and funds are needed to capitalize on the opportunity.
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. Within 1 day, a small business can receive the merchant cash flow you need to keep the ball rolling. Unlike traditional financing, that requires alot of documents, this product only requires typically 3 months bank statements. We don’t require tax returns unless its are large funding amount. In addition, poor credit will not affect you. No more hours of paperwork or years of intensive records to dig through in order to get the finances you need — Our easy-to-access online application makes the process fast and simple. All you need to do is fill out the form, giving you instant access to capital without an in-person consultation.
The basis steps to apply; All we need from you for a business cash advance is:
- Application
- A submitted one-page application
- Proof that your business has been established for six months or more
- Your most recent Merchant Credit Card Statements and/or Business Bank Statements
- Submitted for offer(s)
- Once application is received, it typically takes only 3 to 6 business hours to provide you an offer via a term sheet and/or disclosures with features, rates, payments, terms and conditions.
- Acceptance of an Offer
- If you accept the offer, you simply sign an agreement and provide closing stipulations which is usually a drivers license, voided check or bank letter and any other issues that are unresolved with the approval from underwriting.
- Funding
- Once all conditions have been cleared by underwriting money is sent by wire or ACH to your business bank account!
The payment processing method is set during pre-funding so that repayment goes smoothly.
