The small business

owner’s guide

Merchant cash advances

What isA Merchant Cash Advance?

Is when a company receives a lump sum cash payment in exchange for selling a fixed dollar amount of future receivables. Generally the future receivables sold are debit and credit card receipts.

A merchant cash advance

Of small businesses with a high volume of credit and debit card receipts. For example, a company might receive a $30,000 payment in exchange for selling $39,000 of their future credit and debit card sales.

They are geared to helping the financial needs

How Merchant cash advances work

1. An Advance Amount 2. A Factor Rate

3. A Retrieval Rate

Your company and the merchant cash advance provider negotiate the following terms:

1. An Advance AmountThis is when your company and the merchant cash advance provider negotiate how much your company will receive.

2. A Factor RateThe factor rate times the advance amount equals how much you will need to pay back. For example if you have to pay back $39,000 on a $30,000 cash advance, the factor rate would be 1.3.

3. A Retrieval RateThe percentage of monthly credit and / or debit card receipts that go back to the merchant cash advance provider.

The Typical Terms

Because a company’s credit and debit card receipts can fluctuate. However, the payback period is generally from 4 to 18 months.

There is no fixed time period for a merchant cash advance to be paid back

The factor rate can range from 1.14 to 1.42

According to James Mendelsohn, Chief Marketing Officer at CAN Capital.

The retrieval rate can range from 5 – 15%

The prosof Merchant Cash Advances

James Mendelsohn from CAN Capital indicated that over 50% of those applying for merchant cash advances are approved by his firm. For restaurants, the approval rate tends to be a little higher.

The approval rates on merchant cash advances are high

A merchant cash advance can often be applied for and approved within 1 or 2 business days, with the company providing minimal documentation. A business owner does not need a high personal credit score to get a merchant cash advance.

The approval process is quick

If business gets disrupted, the business does not need to make payments. Note – Business owners do have obligations when they take merchant cash advances. For example, they cannot purposely steer customers away from paying via credit or debit cards

The payment schedule depends on the revenues of the business

The advance if the business goes bankrupt. Unlike many small business lending products, the business owner is not on the hook personally for the merchant cash advance.

The business owner is not personally liable to pay back

The negativesof Merchant Cash Advances

The Chief Marketing Officer of CAN Capital argued that talking about an effective interest rate for merchant cash advances is inappropriately comparing them to loans.

The Effective Interest Rate Can Be 80% Or Higher

Read more about the Interest Rate here.

If you need to takeA Merchant Cash Advances

and play them against each other. There are hundreds of companies offering merchant cash advances, and they all want more business.

Contact at least two companies

By lowering the retrieval rate, a company will reduce the amount of money it’s paying monthly, extend the payback period, and lower the effective APR. Ideally, the expected payback period should be 18 months.

Focus on lowering the retrieval rate (instead of the factor rate).

If the business owner has a personal credit score above 640, it’s worthwhile

to look at term loans instead.

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