Almost all small business owners have ever received funding to expand, advertise, increase inventory or even start their business. Merchant cash advance companies provide quick, flexible and efficient funding whose primary qualification is a proof of steady credit card volume. A merchant cash advance company can be an excellent source of financing, but it can also turn detrimental to your firm’s financial health. Herein, we examine different information related to merchant cash advance companies to help you decide whether to apply or not apply for the advance.
How merchant cash advance companies work
To qualify for a cash advance, your company will first examine your business’ revenue flow. After ascertaining that you have a steady stream of income, your merchant advance company will ask you to provide a bank statement, identification cards, and other credentials to complete the loan application.
After being approved, your service provider will deposit the advance into your bank account within a day or two. The cash advance is payable from your daily revenue till the advance is settled.
Just like any loan, you need to pay the advance plus interest. In most cases, loan repayment can last up to twelve months. However, you can significantly reduce the repayment period to three months by allowing the merchant company to deduct a larger percentage of your daily revenue.
What interest rate do Merchant Cash Advance companies charge?
Ideally, merchant cash advance companies charge a higher interest rate than most if not all types of loans. The merchant advance companies use a factor rate to calculate their interest and the difference between the two types of rates is that interest rate is presented as a percentage while the factor rate is expressed as a decimal.
Therefore, to calculate the total amount you will pay back to your lender, multiply the loan amount by the factor rate. Most companies charge a factor rate of 1.14 to 1.48. When you convert the factor rate to interest rate, you will realize that this loan is charged at a rate of at least 15% per month.
Besides the interest rate, your lender may also charge additional costs like origination fees. So, before signing a deal, ask your bank to explain added costs that come along with your cash advance.
Benefits of Seeking Financing from a Merchant Cash Advance Company
1. Quick cash
A cash advance from merchant advance companies is one of the fastest means of obtaining funds. Your lender will just need your financial statements, identity credentials, business tax returns and other processing requirements to process your application within a day.
2. No need for security
The good thing with merchant advance cash is that you will not need collateral. This implies that your lender will not ask you to pay if your business falls. However, some contracts may require you to pay regardless of your business situation. Read through the agreement form to understand the loan conditions before signing.
3. You don’t need an attractive credit rating
Most lenders will use your credit score to determine your loan limit. However, merchant cash advance companies rely on your sales volume rather than a credit score to lend you. Merchant cash advances are therefore useful for people with a lower credit score.
4. Flexible repayment terms
Most Merchant cash advance companies accept you to make variable payments depending on your credit card sales. On that account, you are allowed to lower your payment when your sales fall and raise them when your credit card sales increase.
Setbacks of Merchant Cash Advance Companies
1. Sky-high interest rates
This type of a loan is one of the most expensive sources of business funding whose annual percentage rates are as high as 300%.
As a rule, your credit score is supposed to improve if you repay your loan in line with the loan requirements. However, this fact does not hold true for Merchant cash advances since they are not recognized as loans by the credit bureaus.
3. Not regulated by the federal government as loans
Merchant cash advances are not identified as loans by the federal government. Therefore, you stand a risk of predatory service providers.
How to identify a good service provider from the rest
Just like any lender, real deals are those transacted with a company that values its customers. One way to ascertain the credibility of your lender is to look at trusted customer review sites like Better Business Bureau or Yelp. Top companies have a higher rating, signifying a higher customer satisfaction score. You may also ask for referrals from friends and colleagues who have used the service before. Financial experts advise that you should consider taking a merchant cash advance if only you don’t qualify for other forms of business financing.