Long Term ACH and MCA Cash Advances
There comes a point in time for any business where the need for immediate working capital arises. During those times the business must balance the need for that working capital with the costs of obtaining the funding. Working capital, at times, can be quite expensive — especially when its secured in a very short period of time. While there are hundreds if not thousands of working capital options to choose from, each working capital lender has different requirements, and the funding they provide can look dramatically different from lender to lender. From a cash-flow perspective, obtaining not only the cheapest rates on the financing, but also the longest terms available is always a priority. By extending the terms associated with the loan allows the merchant or business to reduce the amount that they pay to the lender as repayment on a daily, weekly or monthly basis. In this article we will discuss how to obtain the longest term for a merchant cash advance or ACH business cash advance loan.
What is a Merchant Cash Advance MCA Loan?
Quite simply, a merchant cash advance (or MCA financing) is a quick and easy way for businesses (particularly merchants) to obtain fast working capital through the sale of credit card processing transactions. A cash advance, technically, is not a true business loan. MCA loans are actually the sale of future credit card transactions in return for the business or merchant obtaining upfront financing. The lender will provide financing to the business or merchant, and then remit a percentage of the company’s daily credit card transactions.
What is a Business Cash Advance Loan?
A business cash advance (sometimes referred to as an ACH business loan) is very similar to a merchant cash advance. The main different between the two types of funding are the fact that business cash advances don’t require a company to process credit cards to obtain funding. Instead, a business cash advance lender will provide financing to the small business or merchant, and then is repaid through daily or weekly payments directly to the lender that is automatically sent via bank ACH. Daily payments are made during business days and not on weekends or holidays.
What is a Term?
A term relates to the total period of time a borrower (small business or other) repays a business lender as part of a loan repayment plan. This is different than a rate, which is the interest rate and/or factor rate that is associated with a loan. Usually the longer the term associated with the loan, the easier it is for a borrower to repay on a daily, weekly or monthly basis. The reason why is because if the term is extended, it reduces that amount of money the small business must pay each day, week, or month. The downside of getting the longest term business loans is the fact that the business often pays interest on the longer term. So a shorter term loan may have a lower overall rate than a longer term loan.
What is the Term of a Merchant Cash Advance?
Merchant and business cash advances generally have terms that range from 3-18 months. On occasion, a borrower may be able to get a cash advance up to 24 months, but that is actually very rare. In fact, obtaining a cash advance of up to 18 months may be difficult. The main reason why is because cash advance funding companies generally like to provide short-term cash advances rather than long-term. The shorter the term, the less risk the lender is taking. The longer the term, the more chance that the borrower or merchant will default of the cash advance loan. So getting a long-term merchant cash advance can be very tricky. On top of that, many lenders are skeptical of providing longer terms, because they worry the merchant will then go out and obtain a 2nd position cash advance or additional funding, which threatens the ability of the long term advance lender to get paid back.
Generally, to get the longest term merchant cash advance the business must have decent credit and show solid and consistent cash flow through either the company’s credit card transactions, or into the small business’s main operating bank account. If the merchant shows solid deposits, no negative days or returned business checks, and has sufficient daily bank account averages, they increase their chance of getting a longer term.
Is a Longer Term Cash Advance Worth It?
Cash advances don’t use true interest rates in calculating the rate associated with the financing. Instead it uses what is called a factor rate. A factor rate is a ratio relating to how much the merchant or business must pay back on a cash advance loan. To calculate the amount of the payback using a factor rate, you will take the funding amount, multiply by the factor rate (say a factor rate of 1.25) and you end up with the total amount that the borrower will have to repay. So if a borrower gets an advance of $10,000 at a 1.25 factor rate, the merchant would payback a total of $12,500. Again, factor rates aren’t interest rates, therefore no matter how long it takes for the merchant to payback the loan, they will be paying back identical amounts. So if that merchant gets an advance at $10,000 at a 1.25 factor rate over 4 months, or over 18 months, they will be paying back $12,500 regardless. So, since there isn’t any real savings in rushing to payback early, the merchant generally tends to opt for longest terms because it will reduce how much the business has to pay on a daily or weekly payment for fulfill the loan repayment.
Are There Any Savings For Paying Back Early?
While most cash advance lenders don’t offer any sort of saving for fully-repaying the loan before the term is up, there are some funders who do offer early payment savings. While rare, these merchant cash advance funding companies will offer up to 25% saving if the borrower is able to pay by a specific date. The funder will generally require for the specific date be named before funding, and an addendum will be added to the contract stating if they borrower fully-repays by specific date, they will owe a percentage less.
The approval and funding process is actually fast, quick and easy. The cash advance lender will run the company’s credit along with the owner’s, and analyze the business or merchant’s cash-flow. After doing calculations, the advance lender will then provide an offer providing the funding amounts, payback, factor rate, term and fees. If the small business finds the offer acceptable, they will then sign the contract, provide additional required documents, verify their bank accounts, and they are then funded. The entire process takes anywhere from 1-5 days depending on the funding amount. The larger the funding amount, the more due diligence the lender will conduct.
- Submit signed application and bank statements
- Lender analyses and offers preapproval
- Borrower is provided a formal offer
- Borrower accepts formal offer
- Due Diligence