In our last post, we discussed how hard it can be to get a business expansion loan from the bank. So, what are the alternatives? You can open a business credit card, try to get a short-term loan, or look into financing from friends and family. But if all of those aren’t the right fit, you can consider a merchant cash advance (MCA), which is really on the rise.
It’s exactly what it sounds like — a cash infusion that’s quickly available. It can be very useful for businesses in the restaurant or retail category when high amounts of capital are needed for renovations, inventory expansion, or new equipment.
The merchant cash industry is relatively young, but it’s grown rapidly. In less than 20 years, the MCA industry has gone from $0 to $10.7 billion in 2015. Banks are often reluctant to lend to small businesses or relatively new ones, and these lenders fill that gap in funds availability.
Be aware that the fees associated with a merchant cash advance can be substantial. But, as long as you understand the risk and how to manage the payments, it can be a solid alternative to trying for a bank loan.
The MCA company is actually purchasing your future card sales (not cash) for a discount today.
For instance, they might buy $35,000 worth of future credit card sales for $30,000 today. And that $30,000 represents the cash you receive today, your cash advance against these future sales.
A factor rate is the MCA company’s way of assessing the amount of risk it is taking on when advancing you the money. The more risk they perceive, the higher your factor rate.
Factor rates range from 1.1 to 1.5. This chart explains the factor rate and how it’s very different from a percentage rate.
Things that go into the calculation of your factor rate can include the length of time you’ve been in business, your average monthly sales, and your industry. Once you get your rate, you multiply the amount you need by that rate to see the total amount of future card sales that you must sell to the cash advance provider.
As an example, if you need $30,000 and your factor rate is 1.3, you will sell $39,000 of future card receipts to the cash advance company in order to receive that $30,000.
One of the benefits of a cash advance is that the MCA is paid via a percentage of your future card receipts. That means when your sales go down, less money is taken from your overall revenues. Your cash flow is not reduced as much, which can help your business keep operating if you experience a downturn in sales or have seasonal income fluctuations.
You can also pay the vendor with fixed daily or weekly debits from your bank account. This second approach is known as ACH (Automated Clearing House) withdrawals.
Remember that, because an MCA company is pre-purchasing a set amount of future card sales, you do not benefit by paying the amount sooner. Nor are you penalized if it takes longer for you to pay the purchase price.
Depending on the provider you use, there will be an application (usually short) for you to fill out. And you will know very quickly if you have been approved.
A big bonus to merchant cash advances is that they are unsecured, so you don’t have to put your home on the line or have any collateral.
So, the next time you need cash to do something big for your business, consider a merchant cash advance. It could be a very effective way of achieving your business growth goals.
Simpay can arrange cash advances paid back via your future credit card receivables. We provide loans from $3,000 to $300,000.
There is a simple one-page application to fill out and you’ll know if you’ve been approved in just a few days. If you want more information, please contact us.
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