Facts You Didn’t Know About Merchant Cash Advances Same Day Funding.
What are Merchant Cash Advances? These types of financing provide cash in exchange for future sales from your credit card or merchant processing sales. The most common use is to help small businesses get the funding they need to grow their business and meet payroll, inventory, and other expenses.
What is a merchant cash advance?
A merchant cash advance is a quick, short-term loan that can help small business owners bridge the gap between paychecks. The financing option assists with payroll and other expenses like inventory or office supplies.
Merchant cash advances from reputable sites like American express quickly become one of the most popular business financing tools for small businesses nationwide.
Merchant cash advance lenders
These are “factors” rather than banks or finance companies, or other entities that make loans because they buy your future credit card sales instead of making a loan to you.
Like suppliers who sell on consignment, merchant cash advance lenders can supply money and other financial products before getting paid for by the businesses buying their services. That’s what sets them apart from traditional lenders – otherwise known as “factors” – who expect immediate payment for goods and services.
When you get a merchant cash advance, you don’t receive any funds into your bank account immediately after signing the contract and getting the money. Instead, your “advance” is calculated by how much you’ll get paid via credit card sales for some time, such as 30 days, 60 days, 90 days, or even one year.
That advance rate is multiplied by your expected monthly sales volume to arrive at what you’ll receive in less than 24 hours after signing the contract with your factor lender.
Each state is different.
Each state has a slightly different approach regarding what a merchant cash advance company can charge borrowers in interest rates and fees. States that follow usury laws typically cap the maximum annual percentage rate (APR) lenders can put on their loans at about 36%.
In contrast, states without usury laws might allow lenders to charge borrowers amounts that can add up to 200% or even higher when compounded over time.
Just like when you get a regular bank loan, you probably won’t be able to take out a merchant cash advance in your business name if you already have loans and other debts in your name.
Instead, most factor lenders want the small business owner to take out the advance to personally guarantee that it will pay back what amounts to a short-term unsecured loan (meaning they’re not holding any collateral against it).
Many lenders also do credit checks and pull financial statements before making an advance decision.
The best way to get smaller merchants
With good credit scores and a manageable debt load, to qualify for one of these loans is usually by applying for a merchant cash advance from an alternative lender rather than a large mainstream bank or credit card company.
The higher your credit score and the more liquidity you have in your accounts receivable due from credit cards, the fewer issues you’ll have qualifying for a merchant cash advance with one of these alternative financing companies.
At least a few reputable U.S.-based businesses will provide financial products to businesses outside the country as long as those companies have at least one local billing address for their website’s domain name.
That can make it easier to qualify for a factor loan if you don’t own or manage an actual brick-and-mortar retail storefront location. Instead, do most of your business online via eCommerce.
Most of these lenders charge reasonably high-interest rates on their loans, but they can help you take advantage of how often your factor payments are deposited into your bank account in about 24 hours or less.
That’s because many factors will “advance” the money before it comes due in each billing cycle, which means that in most cases, you’ll be paid ahead of when you need to pay off your loan balance.
You can then use those funds for whatever business purposes make sense for you until the next advance is scheduled to come due by your lender, typically within 24-48 hours after receiving payment from your credit card sales.
When choosing factors
Consider working with a reputable company with a good reputation for quickly advancing funds with low-to-no fees. You can keep more cash in the bank to pay yourself, employees, and other expenses while your business grows instead of spending it all on unnecessary interest charges.
It would help if you also considered choosing a factor that offers merchant cash advances denominated in the local currency where you do most of your business. Even if merchant cash advance companies advertise their loans as short-term “bridge loans,” don’t assume that you’ll have a final payment due date shortly.
Some factors will set up their merchant cash advances with automatic renewals or rollovers at the end of each term if you default on your payments, which can cause you to owe more than what it’s worth ultimately. So be sure to read all of the fine print before signing any loan agreements from a factoring lender.
Frequently asked questions
How does a merchant cash advance work?
A merchant cash advance is an alternative source of financing. Businesses use it to fund operating costs such as payroll, inventory purchases, equipment, rent, utilities, etc.
It works like this: Your factor provides you with a line of credit based on the value of your accounts receivable. If you accept a merchant cash advance, you agree to repay the amount borrowed plus finance charges over time. The factor keeps track of how much money you borrow and when repayment is due. In return, they receive a percentage of your outstanding invoices.
When should you consider a merchant cash advance?
If your business is experiencing financial challenges, a merchant cash advance may be a viable option to bridge the gap between current cash flow and expected incoming revenue.
For example, let’s say you’re a small business owner who just started. You’ve been working hard for months but haven’t seen much progress yet. It would help if you had some extra capital to keep growing. A merchant cash advance could provide you with the funding you need to get things moving.
What can I use a merchant cash advance for?
Merchant cash advances from reputable sites like American express are typically used for three purposes:
- to cover immediate expenses,
- for expansion, or
- to pay off high-interest debt.
When you apply for a merchant cash advance, your factor will ask about your current situation. They’ll want to know why you need the funds and whether there’s anything else going on in your life that might affect your ability to repay the loan.
What are merchant credit card fees?
Fees vary by issuer, so check with your factor before accepting a merchant cash advance offer. Some factors charge annual fees, while others charge monthly fees.
How long can I borrow for?
The length of a merchant cash advance depends on several variables, including your company’s size, industry, location, and other factors. Factors usually allow companies to borrow anywhere from 3 to 12 months.
How can I qualify?
It would help meet specific criteria to qualify for a merchant cash advance. These include having enough customers to support the loan and making timely payments.
Debit card sales and cash advances
Merchants have two options when it comes to processing debit cards. They can either swipe them through a point-of-sale terminal or process them manually.
Who are the merchant service providers?
There are many different merchant service providers (MSPs) available today. Each offers its unique combination of features, services, and benefits. MSPs range from total service providers offering everything. They offer merchant account setup, ongoing management, and simple one-stop shopping websites that only require basic information.
Can I get business financing on the same business day?
Yes! Most merchants can apply for their loans within minutes after submitting their applications online.
What other business funding options should I consider?
Other than merchant cash advances, there are different ways to fund your business. For example, suppose you don’t already have an established relationship with a bank. In that case, you may want to explore alternative sources of financing such as factoring in invoice discounts
How do the business loans work?
Business loans work differently depending on which type of lender you choose. Typically, this financial service comes with terms ranging from 6 to 24 months. The longer the time, the higher the cost.
Are there risk factors?
Risk is always present with this financial service. However, most lenders take steps to mitigate this risk. This includes requiring collateral, maintaining a solid balance sheet, and monitoring borrowers closely.
Can I qualify if I have bad credit?
You may not qualify for traditional bank financing if you have a poor credit history. Fortunately, there are alternatives. For instance, some businesses use invoice factoring to finance their operations. Factoring is similar to a commercial line of credit.
credit card payments
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