There lies a history behind the term. In general, it is an alternative for small business funding. If to be more concrete, a creditor does a one-time payment in exchange for future credit card sales. Such financial operation was structured at first.
But as time went by, the meaning of the term has widened. Now it means different kinds of small business funding with a set of certain characters. These refer mostly to the term shortness and regularity of the small payments. Sometimes the term is also used for short-term business loans.
How Does It Work?
There are two parties, small business is a receiver, and merchant cash advance provider is a lender. They make an agreement, where all conditions are spelled out. They include an amount of the merchant cash, payback sum, and so-called “holdback” percentage. After the agreement, a specified sum goes to the small business’ account. All of this happens in exchange for the future receivables from the credit card.
The rest is paperwork. An appointed amount of money would be daily sent from the bank account to the cash provider. Merchant cash advance companies call it a “holdback” percentage. There is no need for traditional collateral because of the access to the business owner’s account.
As the repayment is based on the daily income of the business, the payback strongly depends on commercial success. More bank transactions mean a faster repayment of the advance. At the other extreme, if transactions are lower than they should be, repayment terms extend automatically.
What Are the Costs?
A few of the merchant cash advance providers inform, that a business may pay back near the 20 percents of the loan.
It is worth to note, that there is a significant difference in the holdback amount and the repayment of the whole advance. These figures may be quite different, for instance, several times. Thus, it is important to differentiate them.
The common question is, how do they calculate a holdback percentage. Well, there is a bunch of factors. If we try to give a summary of them, it would be next. The holdback percentage depends on the agreement terms and business’ income. Agreement terms indicate two things. First, how big was an amount of the received funds. Second, how long will it take to repay it? Lastly, the monthly receivables are important, they have influence as well. Let us show you the average numbers.
For example, a small business took $14,000 as an advance. It also agreed to repay $16,800. It means capital that the overall payback will be 20 percent of the advance amount. In other words, a factor rate will be equal to 1.20. Still, it doesn’t mean, that daily holdback percentage will be also 20 percent. In most of the cases, it would be too challenging for the small business.
To avoid such a situation, a majority of the companies agrees on the half of the amount. Of course, not always but for the most part definitely. In our circumstances, it will be 10 percent of the credit card transactions until the full repayment. If in an average month a business gets $13,000 from the credit card sales, a monthly repayment will be near the $1300. The whole repayment period takes then 12 months all-in-all.
Take a note, that it is purely an average example and not the unappealable truth. The holdback rates may vary from ten to thirty percent, depending on both business and provider.
When Is a Merchant Cash Advance Appropriate?
There are quite a lot of loan possibilities. Everyone suits a certain purpose. So when is it reasonable to address the merchant cash advance?
First, when one needs capital in a very short amount of time. Traditional loans may take up to several months. But there are times when you need money quickly. That is the case.
Another reason to choose a merchant cash advance is confidence in the adequate profits flowing. Because the daily payments are the key, an applicant is better off with financial certainty. Of course, it can’t be absolute.
And the third reason is inseparably connected with the second. The game should be worth the candle. Interest rates are at stake, so success is highly essential. The merchant cash advance is extremely useful for the people, who have a weak credit score.
They may have difficulties with traditional loan types. That’s when the cash advance for businesses comes at the help. There aren’t so many harsh requirements and anyone has a chance to get it. You don’t need a perfect credit history to confirm own reliability. Besides, there isn’t any secured property, hence, you won’t lose a home or a car.
P.S.: Learn what cash advance for the business is.