On the plus side, since payments to the cash advance company come right out of a business’s daily sales, cash flow may be a little easier to manage than having a fixed payment. You pay back more toward the advance when sales are high and less when sales are slow, which minimizes the impact of business swings.
Even if your best option is a merchant cash advance, shop around between companies for the best terms
Cash advances are typically processed much more quickly than traditional loans, so the money will be available faster, usually within a couple of days. And they are more dependent on the historical performance of a business than the owner’s personal credit score, so some companies may find them easier to qualify for.
That said, they are expensive. For example, you would sell about $25,000 of future credit card sales to get an immediate lump sum payment of $20,000 from a finance company. The finance company would then take a portion of every credit card or debit card sale you make (generally from 5 – 15%) until the entire $25,000 is collected. In essence, that means you’re paying $5,000 for the $20,000 you need, or a hefty 25%. Depending on how quickly you pay it back, the annual percentage rate on a merchant cash advance can be as high as 60 – 200%, according to Leonard Wright, the “Money Derican Institute of CPAs.
Not only is it costly, the cash advance comes right off the top of your sales, leaving you with that much less to pay the rest of your bills. Depending on your profit margin, that means you’ll have to very carefully weigh how much cash you take against how large a percentage you’ll have to give up. You need to make sure you’re doing enough sales, with installmentloansgroup.com/payday-loans-az a wide enough profit ount you borrowed.
How Does a Merchant Cash Advance Work?
So, how do the advances work? While the requirements are less stringent than they are for bank loans, they do exist. Even though strict credit checks may not be required, companies that offer merchant cash advances will typically not lend to firms that have been in business for less than a year, or those that have filed for bankruptcy or have tax liens against them.
The finance company is primarily interested in your credit and debit card sales, because that’s how it’s going to be paid back. So the amount you can borrow will depend on how much volume you do on the cards.
The newer category of cash advances, ACH (Automated Clearing House), also serves customers that don’t do much in the way of credit card sales but still have daily income. These link directly to your bank account and debit your payback each day, week, or month. Each lending company has its own system to measure your sales and decide how much money it will advance.
Knowing how expensive this type of financing is, however, it is vitally important to not bite off more than you can chew. A reputable cash advance company will be very careful to understand your profit ount they’re taking from each sale doesn’t interfere with your ability to survive as a business. Of course they want to be paid back as quickly as possible, but they need to adjust their retrieval rate to something that works for both of you.
Again, because this business is not regulated like banks and other lenders are, there are no clear guidelines for the disclosure of all the fees and costs involved. Make sure you know exactly what the terms are before you sign a contract. Every aspect of the transaction should be clear and transparent. Ask for (and double check) the APR on the money you have to pay back, so you can compare the cost of this money to other funding that might be available. The field is very competitive.