Have you wondered if a merchant cash advance is right for your business? If you have you are in the right place to get a few answers. We will take a look at how the process works, as well as some caveats you should consider before taking out the advance.
A merchant cash advance is based on credit card sales. It is not a business loan in the true sense. You do not have a specific monthly payment or length of term for the money lent. Instead you are given access to funds based on your projected credit card sales. The merchant cash advance company will then deduct a certain amount each day or month from the credit card sales you make. This is an amount agreed upon in the very beginning. If a company cannot make a payment that month they can continue the merchant cash advance. Most companies require all advanced funds to be paid off within 12 months, but it is not necessary. The longer merchant cash advance is open and unpaid the more interest the cash advance company makes.
Let’s look at an example. Your company needs $10,000 for an expansion. The merchant cash advance company offers loans for 100 percent APR or annual percentage rate. It means if you have the loan for 12 months you owe double the amount you borrowed. If you have a business loan for $10,000 at 6.5 percent you would definitely owe less in interest. Where the merchant cash advance can work for you is in how quickly you pay off the loan. You have projected credit card sales for the month of July at $40,000. You take out the $10,000 merchant cash advance on July 1st. In seven days you make $10,000 in sales, in 14 days you make $20,000 in sales.
At half a month you have the full amount of $10,000 to pay back, with $10,000 extra. Since you took only 14 days to pay the merchant cash advance back you need to determine what the periodic rate would be. To figure out the periodic rate take the interest of 100 percent and divide by 12 months. This tells you how much interest you will be charged in 1 month. Our example is for 14 days, which means you can also divide by 365 days and then multiply that answer by 14. This should give you the amount of interest the company will charge you.
By calculating the interest charged you can determine how quickly you think you can pay the merchant cash advance back. You can also decide if the interest and any fee charged to set up the cash advance are reasonable. In a business where you need cash immediately and cannot wait for a regular bank loan to be processed the merchant cash advance might be your best solution. Once you have an account set up you can use it as you see fit, as long as payments are being made. There is a cap on the amount you can borrow of course.