Merchant Cash Advances – What You Should Know
April 19, 2009 by Matthew Hunt
In our current economic times a small business needs to have a certain ability of resourcefulness to enable survival. With loan default rates higher than they have ever been, banks and our traditional lending institutions are not lending money to the entrepreneurs who need it the most. So what does a small business owner do if they find themselves in position needing a loan to help grow their business, yet no bank will help?
One option is a merchant cash advance. These Merchant Cash advance work a similar to a loans- you apply, agree on rates and advance amounts, and then begin repayment. The “advance” that you receive is paid back automatically out of your daily debit and/or credit card sales. You have to meet certain qualifications to be eligible, namely, accepting debit and/or credit cards.
A few other typical requirements are minimum lease agreement for at least one year and not to currently be in another Merchant Account Cash Advance agreement. Having a solid financial history, existing equipment, etc also helps but isn’t the main factoring decisions that secure an approval. These Merchant Account advances are usually easier to qualify for than traditional loans- in some cases up to 90% of applicants are approved for amounts into the hundreds of thousands of dollars.
If this sounds easy, or too good to be true, you’re half right. Merchant cash advance transactions can be expensive, carry onerous repayment terms. What you are basically doing is selling your future sales at a discount to get cash today. The buying selling arrangement is can be anywhere from 1.2-1.45.
What that means is for every dollar you qualify for you are selling for 20-45% less. If you qualify for $10,000 and your buy factor rate is 1.30 then you will essentially pay back $13,000 so that you can have access to Ten Grand today. They way you pay this type of lending back is through your credit card sales. Typically anywhere from 15-25% of your daily credit and/or debit card sales goes directly to the Merchant Cash Advance Provider until the full terms is paid back.
The reason why approval rates are very high is because most merchant account cash advance providers have control of your merchant account. They either make you use a merchant account provider where they have all your credit card sales deposited into a trust fund account first where they then remove their percentage owed and then pass on the remainder to you. They do this because it obviously guarantees payment.
Now there are a few providers that don’t require you to use any one provider and instead put a data feed on your account that pings them of your deposit(s) at which point they then make a automatic withdrawal out of your business account for the amount owed. Some merchants prefer this type of merchant account funding because the deposits are quicker into the Merchants account.
THE GOOD NEWS:
- If you make a lot of sales you can pay this money back very quickly.
- It’s more like a payroll deduction and you typically only pay if you make sales. Because it’s based on your daily sales of credit cards.
- They typically don’t ask what it is for nor do they require any business plan explaining the plan for the extra capital.
THE BAD NEWS:
- It’s really expensive.
- It’s addictive – many merchants go back up to 3-4 times for these merchant account cash advances because of the liquid cash laying around.
- Credit Card deposits can be delayed by 2-4 business days.
BE CAREFUL:
While most merchant account advances can be helpful there are a few things you should avoid:
- Pledging collateral, or giving the provider access to bank accounts as reserves for repayment. Things can get ugly pretty quickly if you aren’t able to repay the advance as scheduled- providers can take money directly from your business checking account, seize, or place liens on business property, and take other drastic actions. Make sure you’re protected by the contract you sign.
- Flexible retrieval rates. These allow the provider to take more out of your daily sales amounts than is safe to continue operating your business. You have to ask yourself, can you business survive without 15-20% of it’s credit card sales…? If the answer is no then this may not be a good retrieval rate for you and you may not want to use a merchant account cash advance.
Merchant cash advances can be a beneficial source of alternative financing for businesses that need cash for operations, business opportunities, or other expenses.
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