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2nd Position Merchant Cash Advance

Additional Position Cash Advances

While merchant cash advances are far from the cheapest form of business financing, they can be crucial for companies without sufficient credit and cash-flow for traditional financing, or for companies that need fast business financing, and don’t have the luxury of going through a months long process of obtaining traditional business loans through a bank. After obtaining a business cash advance, a company may find themselves with additional financing needs before the 1st merchant cash advance is paid-off. In those instances, a small business may feel the need to secure a 2nd cash advance. Or, if the company meets certain requirements, have a lender buy-out the initial cash advance, and provide new financing that would allow the borrower to make a repayment to a single lender.

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What is a Merchant Cash Advance?

A merchant cash advance is a type of “unsecured business financing” where a company sells future business sales to a funder for an upfront amount cash. Repayments of a merchant advance are made daily through ACH payments made through a company’s banking account, or by remitting a percentage of each day’s credit card transactions (or, in a process called split payments, a lender can do a combination of bank and credit card remittances). Merchant cash advance lenders have very high approval rates, sometimes as high as 95%, as merchant cash advances are cash-flow driven, not credit-driven. In fact, many cash advance funding companies have no credit requirements at all. The application process is relatively simple as a minimal amount of business documents are needed, and funding takes a matter of days, as opposed to months with traditional financing. But since these lenders are willing to take increased risk, their rates are much higher than you’d see with traditional business financing. In fact, a factor rate can be as high a 1.55%.

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1st Position Advances
2nd Position Advances
3rd Position Advances
4th Position Advances
Cash Advance Refinance
Cash Advance Consolidation

What is a Factor Rate?

A factor rate is the way that “interest” is calculated using a merchant cash advance. I lender will provide terms that state the funding amount multiplied by a factor rate. The factor rate is a ratio, and the portion above 1.0 represents the interest. So if a company gets a cash advance for $100,000, and has a factor rate of 1.20, the borrower will be paying back $100,000 multiplied by 1.20, thus: paying-back $120,000. Since a factor rate isn’t an interest rate, the borrower will end up paying-back the full amount owed, regardless if they payback early (although some merchant cash lenders will provide savings if paid back early — which is usually laid-out before the contracts are executed and the company is funded).

How Do You Get a Merchant Cash Advance?

There are hundreds of merchant cash advance financing companies in the United States. Once you have found the best merchant cash advance lender to work with, you will need to submit a credit application, bank statements and credit card statements (if your company processes credit cards). The funder will analyze a company’s deposits in their bank and/or credit card processing statements, along with running a credit check on the business, and decide what amount of financing they’d feel comfortable forwarding to the small business. Once a funding amount is determined, the lender will then send the business a contract laying-out the rates and terms of the financing agreement. After the contracts are signed, and further stipulations are met, the lender will then look to verify that the merchant’s accounts are real and that the bank statements provided during the approval process were accurately provided. If determined that all information is accurate, the lender will then deposit the money directly into the company’s business accounts.

What is a UCC-1 Lien Filing?

Uniform Commercial Code-1 (or more commonly called a UCC-1 financing statement) is a way a lender gives legal notice that they have interest in a small business or SME’s commercial property, and protects the lender’s interest should the borrower fail to repay the loan. When a creditor files a UCC-1 financing statement against the company’s assets, they are establishing themselves as first in-line to collect should the company fail to payback their loan. Once the UCC-1 lien is filed with the Secretarty of State where the small business is located, the creditor has “perfected” the UCC-1 lien, and they then have priority over any additional lenders that file UCC liens after them. The term of a UCC-1 lien is usually five years, and needs to be renewed by the creditor after 5 years should the term extend beyond that term. It is up to the small business to have the lien on their company removed once the loan is paid-in-full.

How Does a Previous UCC Affect Getting Another Advance?

If a company has a previous lien placed on their business by a merchant cash advance lender, they may have a tough time securing additional financing. To get financed, they’ll need to find a lender willing to take another “position“. By position, it means a lender that is willing to file a UCC-1 lien knowing that their claim on the business assets (should the borrower default) would be subordinate to the previous lender’s claim. This new lender would have to take a 2nd positions merchant cash advance lien against the business. This isn’t unusual, in fact, there are lenders willing to make 3rd position merchant cash advance loans, or even 4th and 5th positions. But the key is knowing which lenders offer 2nd, 3rd, 4th or 5th position business cash advances, and finding the best possible terms associated. Since these lenders are putting themselves in a position to be left without anything to collect if the borrower defaults, the rates for higher position business loan stacking are much higher than a first position cash advance. On top of that, the term associated with a second position cash advance are almost always shorter than the first position advance.

2nd Position Business Cash Advance Options

Ideally, the best option to is not take-out a 2nd position short-term business loan, but instead obtain more traditional financing like bank loans, or SBA financing to refinance their business debt. If they are unable to get more traditional financing and are looking for another advance, we’d recommend the borrower find a cash advance company willing to buy-out, consolidate and/or refinance advances, and allow the company to make a payment to a single lender. Turning to a 2nd position business advance lender should be a last resort.

Cash Advance with Weekly Payments

Getting a first position cash advance with weekly payments is difficult enough. Only a small fraction of small businesses seeking cash advances are approved for weekly payments, and the business generally needs to show consistently strong bank account balances and the ability to make large payments each week. So, while its difficult to get a cash advance with a weekly payment as a 1st position, getting a 2nd position cash advance with weekly payments may seem impossible. But that’s not necessarily the case. If a small business shows they have the financial ability to support weekly payments, and the funder feels that you are less likely to stack again, you may be able to get a 2nd or even 3rd position cash advance with weekly payments.

Factor rates 1.10 – 1.50
Terms 3-24 months
Funding Amounts $10,000-$2,000,000
Collateral Not required
Fees Low to Medium costs

 

Cash Advance with Twice a Week Payments

While merchant cash advances tend to be underwritten using computer programs, there are actual human underwriters reviewing each file, too. Human underwriting allows for the funding company to get creative in structuring multiple position cash advances. One way these underwriters are able to get creative is to provide twice weekly payments. These payments can be schedules for any two days of the week to ensure the merchant can repay smoothly.

Factor rates 1.10 – 1.50
Terms 3-12 months
Funding Amounts $5,000-$2,000,000
Collateral Not required
Fees Low to High costs

 

Daily ACH Advance

Sometimes it doesn’t make sense for a nonprofit business (or any business) to outright purchase equipment for their businesses uses if the company feels they may be stuck with outdated equipment in just a few years. Additional reasons to avoid purchasing equipment outright is because it may require obtaining a term loan to buy the machinery. A way to avoid taking a loan or having outdated equipment is to lease the nonprofit business equipment instead. Nonprofit equipment leasing works by having a lender purchase the equipment for the nonprofit, and then leases to the organization for a period of time.

Factor rates 1.10 – 1.50
Terms 3-24 months
Funding Amounts $2,000-$2,000,000
Collateral Not required
Fees Low to High costs

 

MCA Split

True merchant cash advance split funding is similar to an ACH advance, in that it’s the sale of future receivables to a cash advance funding company in which they receive upfront funding for sales in the future. The difference between MCA split funding and an ACH cash advance is how the funding is repaid. A MCA advance isn’t repaid using the merchant’s bank account, but instead the funding company collects repayment by taking a perentage of the small business’s merchant credit card sales. There isn’t a set amount taken each day, but instead the funding company simply collects a percentage of each sale. On days when the small business has no sales, there is no payment expected to the funding company.

Factor rates 1.10 – 1.50
Terms 3-12 months
Funding Amounts $5,000-$250,000
Collateral Not required
Fees Low to High costs

 

MCA Lockbox

MCA lockbox funding is nearly identical in structure to a conventional MCA split. The main difference is the way in which the money is collected to pay the funding company. Instead of the merchant batches being directly deposited into the small business’s merchant account, the money is instead sent to a new bank account controlled by the funding company where the funding company will collect their payment, and the remaining amount is sent to the small business.

Factor rates 1.10 – 1.50
Terms 3-12 months
Funding Amounts $5,000-$250,000
Collateral Not required
Fees Low to High costs

Summary

As you can see, there are a number of options available for small businesses who have a current merchant cash advance who are seeking additional funding options. But, if you obtain the wrong type of financing, you may find yourself with an expensive form of financing that can put a strain on your cash-flow. Therefore, if you are seeking additional business capital to help with expenses, and need help getting the lowest rate financing, please reach-out to one of our merchant cash advance specialists, and we’ll help you navigate the process.

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