Merchant cash advance refers to an instrument that can be employed by entrepreneurs to attain an advance for incomes in the future. The entrepreneur has to consent credit cards or possess alternative compensation proceeds that stream consistently into a merchant account. Merchant cash advances are advances that depend on business revenue and sales in the future, unlike loans. Entrepreneurs trade a fragment of their future sales to attain instant advance on the capital.
The process of risk evaluation by merchant cash advance providers is dissimilar to the customary bankers. In general, merchant cash advance providers will evaluate risks using the daily credit card sales of the enterprise. The business qualifies for a merchant cash advance if they can manage to reimburse during the right period. Merchant cash advance has higher rates as compared to business loan alternatives. Also, merchant cash advance providers deliver advance to enterprises that might not manage to attain business loans.
The process of a merchant cash advance
The merchant cash advance provider and the business have an agreement on the conditions of advance, amount of payback and holdback. The entrepreneur and the merchant cash advance provider come to an agreement on the advance, and in return, the enterprise provides a portion of future credit card sales.
Holdback refers to a prearranged percentage of day-to-day receivables that is reserved to repay the merchant cash advance. The revenues are withheld until the merchant cash advance, and the additional rates paid in full. Since the merchant cash advance provider has to the accounts of the enterprise, there is no need for collateral like in taking business loans.
Reimbursement of merchant cash advance is dependent on a number on transactions carried out by the enterprise. Therefore, the more transactions, the faster the compensation since the merchant cash advance provider takes a portion of the daily transaction amount. Business owners should be aware of the difference between the holdback and the payback rates through Merchant Cash Advance Training. The holdback refers to the day-to-day transaction percentage taken by the merchant cash advance provider while the payback rate is the interest on the first advance that the business will pay back.
The percentage of the holdback usually depends on factors like the monthly revenue of the enterprise, the duration it will take to payback and the amount of the advance. For example, an enterprise gets an advance of $200,000 and agrees to repay $250,000. Therefore, the rate of repayment is 25% or 1.25 as the factor rate of the advance amount. Also, the merchant cash advance provider will deduct 20% of the credit card transactions of the business. Consequently, suppose the enterprise has an average of $160,000 in credit card sales every month, the merchant cash provider is given $32000 every month till the $250000 is paid in full. Holdback rates may vary between 10% to 20% depending on the business risk evaluation of the merchant cash provider.
Deciding on taking a merchant cash advance
Taking a merchant cash advance may be a good alternative for a business if they need fast access to funds, can align the high advance rates and has good cash flow in the merchant accounts. The merchant cash advance also has fewer requirements than the traditional business loan. Moreover, the process of getting a merchant cash advance is quicker than taking a business loan. It can take a few hours or days to get approval. After approval, the business can access the advance in their account in 2 days.
The application process usually takes about one or two pages of vital information like the business social security number and tax ID. Past payment history is a requirement this includes credit card transactions and bank statements
The merchant cash provider requires the business to change credit card processors. After the terms are finalized, the business has approval for the advance. It is essential to know when the payments begin which could be as soon as the next business day. Finally, the merchant cash advance is deposited in the bank account of the business and payback starts via the merchant account
Alternatives to merchant cash advance
One of the demerits of a merchant cash advance is that it does not assist in building the credit profile of a business. Merchant cash advance timely payment is not reported to any business bureaus unlike what happens when a business loan is paid in time. Therefore, a company may take an online small business loan instead since it has numerous similarities with Merchant cash advance in the case of convenience.
Therefore, it is crucial for a business owner or entrepreneur to know the requirements of a merchant cash advance and the terms before they can apply for one. Moreover, they should weigh all the options such as asking for a business loan and make the best decision for the enterprise.