Best Merchant Cash Advances
Due to the fact that large, small and community banks aren’t making cash readily-available to small businesses as they once had, there has been a growing reliance to online alternative lenders for small companies. Online alternative lenders are able to provide small businesses with less than stellar credit the ability to access fast capital (funding can take days if not hours) without requiring an abundance of financial documents (sometimes only needing a few months bank statements). Alternative lenders as a whole have average approval rates around 70%, with some lenders approving 95% of small businesses financing requests. Obviously these lenders are taking on much higher-risk than traditional lenders — which will reflect in much higher rates than bank term loans and lines of credit. To help reduce the lending company’s risk, they will often structure the financing facility as a merchant cash advance.
What is a Merchant Cash Advance?
A merchant cash advance is not a loan but, instead, the sale of a company’s future bank deposits or credit card transactions for an upfront lump of money. Repayment of the loan is made through the the daily remittances from a company’s bank accounts or credit card merchant processing accounts. The borrower then pays back the merchant advance through the use of either split withholding, lock box withholding or ACH withholding:
- Split withholding: when the merchant cash advance company obtains repayment by splitting credit card sales with the borrowing small business. The borrowing company usually receives between 80-90 of deposits/credit card sales, with the merchant cash advance lender taking 10-20% until the cash advance is paid-off.
- Lock box withholding: All of the borrowing company’s credit card sales and bank deposits are placed into a bank account which is completely controlled by the merchant cash advance lender. The cash advance lender then forwards the borrowing company the proceeds (minus the financing company’s repayment).
- ACH withholding: An agreed upon fixed amount is deducted from the borrowing business’s bank accounts daily (Monday through Friday – not including holidays) until the cash advance is paid back.
What are Merchant Cash Advance Uses?
- Working capital
- Expansion
- Make Payroll
- Advertising
- Make Payments to suppliers and/or vendors
- Higher employees
- Pay taxes or other liabilities
What are the Best Merchant Cash Advances?
Quite honestly, the best merchant cash advance is the cash advance not taken. While cash advances for business offer the company quick access to capital and cash, they are also extremely expensive and can destroy a company’s cash flow. Merchant cash advance companies don’t calculate interest like a traditional lender does, but instead uses a “factor rate” (sometimes called “buy rate”) to calculate interest payments paid to the lender. Factor rates for merchant advances range from 1.15 – 1.55. To calculate the interest of the sale of bank and credit card deposits, the lender will forward the company a lump sum, and the total payback will then be multiplied by the factor rate established by the merchant cash advance companies. Since these types of alternative business lenders often provide terms less than one year (usually between 4-6 month terms) the actual interest rate when calculated on an annualized basis can be 2-3 times higher than the factor rate. And that doesn’t even calculate the fact that interest on traditional loans only applies to the outstanding basis, where as with a merchant cash advance the interest is already added into the facility from the beginning.
