Pros and Cons of a Merchant Cash Advance

Pros and Cons of a Merchant Cash Advance

Merchant Cash Advance Terms

Whereas traditional business term loans have set a repayment period—you repay a loan with monthly payments over a term of five years, for example—merchant cash advance terms do not work the same way.

As we’ve mentioned, you repay the funds you’ve borrowed from an MCA with your debit and credit card sales, or from withdrawals from your bank account. Most often, these payments are made on a daily basis, but sometimes companies will offer a weekly basis.

Because the repayments are based on your sales, the terms of an MCA will vary. In other words, you’ll repay the advance for however long it takes to cover the total amount you received plus fees.

Although $125 per day may not seem like much, when it comes down to it, the APR on this merchant cash advance loan is nearly 66%—which is extremely high

Overall, the average repayment time for a merchant cash advance is eight or nine months. However, the term could be as short as four months or as long as 18—it all depends on your business. To this point, paying the financing company a higher fixed percentage of your sales will equal a shorter repayment time—but also a tighter cash flow.

Let’s say you’re advanced $20,000 from a financing company to fund some renovations for your retail shop. The financing company is charging a factor rate of 1.18.

If you multiply the $20,000 by 1.18, you’ll get $23,600—which is the total amount you’ll need to repay with your daily debt and credit card transactions.

The merchant financing company will take 15% of your credit card sales to cover that amount. How much you’ll actually pay on a daily basis will vary based on your sales. The higher your sales, the faster you’ll be able to pay off the advance.

This being said, let’s say you estimate $25,000 per month in credit card sales. If you divide $25,000 by 30 days in a month, you’ll get approximately $833 per day.That means you’ll pay $125 every day, or 15% of $833.

At $125 a day, it will take 189 days (roughly six months) for you to repay the total amount of $23,600.

This is why MCAs can be so misleading—at first glance, the numbers seem reasonable and a factor rate of 1.18 seems low. However, when you calculate the APR on these products, they often end up being very expensive, especially in comparison to other types of business financing.

For this reason, before you agree to a merchant cash advance from a financing company, you’ll always want to convert the factor rate to an APR to determine the true cost of this debt and decide whether or not it’s something you can afford.

At this point, you may have started to see some of the inherent advantages and disadvantages of a merchant cash advance. Therefore, in order to help you decide if this type of financing might be right for your business, let’s break down these pros and cons in greater detail.

  • Quick access to funds: When it comes down to it, a merchant cash advance will be one of the fastest types of financing for businesses. In general, you can apply for an MCA online and receive approval and funding in as little as 24 hours. Compared to other loans that require extensive documentation, MCAs have very simple application processes.
  • Easy approval process: Not only is the process itself simple, but MCAs are one of the easiest financial products to qualify for. MCA companies will often pull your credit score and evaluate your other qualifications; however, they’re much more lenient when it comes to approval. Many financing companies will work with startups, businesses with bad credit, as well as those with previous financial issues. Of course, your qualifications will not only affect your ability to get approved for a merchant cash advance loan, but your rate as well. If you have bad credit, for example, you’re more likely to see higher rates.

Оставьте комментарий

Ваш адрес email не будет опубликован. Обязательные поля помечены *