What Is A Merchant Cash Advance?
A merchant cash advance is a lump sum that is paid back via a fixed percentage of daily debit and credit card sales. So, in order to be approved for a merchant cash advance, you must be able to show consistent debit and credit card sales within the most recent months. What you don’t need, however, is a perfect credit score. This is because a merchant cash advance is extremely easy to pay back. That aforementioned percentage is deducted automatically, even before the deposit reaches your bank account. In other words, there’s virtually no such thing as a “missed payment” with a merchant cash advance.
Your lump sum is based on the amount of revenue you are projected to receive via debit and credit card sales. Instead of a traditional interest rate, you are given a “factor rate” and a “retrieval rate.” Factor rates generally range between 1.09% and 1.5%, while retrieval rates can range from 5% to 15%.
So, let’s say you are assigned a factor rate of 1.15 and a retrieval rate of 10% for a $50,000 MCA. On a given day, you conduct about $2,000 worth of debit and credit card sales.
- $50,000 x 1.15% = $57,500, or the total amount you would have to pay back.
- $2,000 x 0.10% = $200, or the amount that would go to the business lender until the $57,500 is paid back in full.
While the percentages are based on daily sales, the frequency in which payments are collected varies. Payments are made whenever you batch out your transactions, which most often happens daily, but not always.
What Do I Need A Merchant Cash Advance For?
Like any other working capital product, a merchant cash advance makes sense when you are projected to earn significantly more money than you’d have to pay back. Choosing a merchant cash advance over another option usually comes down to how long it will take for the debt to be paid back in full.
A long-term investment is, by definition, more expensive and more lucrative than a short-term investment. But just because an investment takes a few months to impact revenue doesn’t necessarily mean it takes a few months to carry out. This explains why a marketing campaign, bulk inventory order, and a new piece of equipment are all valuable uses for a merchant cash advance. You could fund your investment and potentially pay the principal down with the increased revenue you are projected to receive as a result.
What makes a merchant cash advance so advantageous for seasonal businesses is the ability to make lower payments when business is slow. The slow season is followed by the busy season, but you cannot expect a strong busy season if you do not prepare in the months prior. A merchant account loan allows you to spend months focusing on preparation-related strategies (increasing staff, developing a new product, etc.) without having to make high fixed payments that could kill cash flow.
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Many small business owners use merchant cash advances to cover regular business expenses during slow periods. But this is only a sensible decision if the business is using its own funds to increase or at least stabilize revenue. For this reason, it might not be in your best interest to take out a merchant cash advance to get you through a temporary, unexpected cash flow crunch. Apply now to see how much you qualify for!