Cash Advances sometimes have bad connotations, but they are a great source of working capital for your business. Today, I am going to go over the pros and cons of merchant cash advances and give you a little education about them so you don’t get burned and possibly hurt your business in the long run.
Let’s start by answering, what is a merchant cash advance? Well, if you accept credit cards from a processor or Point of Sales system, you’re accepting the form of payment that you will use to pay back the advance. A cash advance company keeps a percentage of your credit card volume that goes through your terminal. Normally, the “batch” sends all the money in the terminal to the credit card processing company, who then sends to your bank account. If you have had your business for a year or more, you have a predictable source of revenue, meaning that if your revenue is $1,000 a month, it is assumed that you will continuously make $1,000 a month for the next 12 months.
Picture this scenario, you want to open another location and you need capital. What do you do? You could go to a bank. Yes, they have good interest rates and the payment terms are long, but it is very hard as a small business to get approved. Even if you did get approved, it could take 60 to 90 days for the money from the bank to process and you may need that money now.
I have personally used cash advances for my company. Sometimes, you just need the money. Here at Transaction Expert, we are partnering up with Strategic Funding to create a merchant cash advance program. If you make $10,000 in revenue through credit card processing, they will give you an $8,000 to $12,000 loan or advance. This is about 80% or 120% of your monthly credit card processing revenue, like a factor rate loan.
Let’s cover the Pros and Cons of cash advances.
- Quick- You can get the money in 3 to 5 business days
- No Personal Guarantee (in some cases) – Normally, credit is not a major consideration. Cash advance companies care about if you will still be in business by the time the cash advance is paid back. They want to make sure that the money will help your business, not hurt it.
- Not a Fixed Loan Payment- If you were to get a loan from the bank, they would give you a specific amount of money to pay each month, such as $1,000 a month. With a merchant cash advance, it takes a small percentage, usually about 10% to 20%, of ONLY your credit card processing revenue on a daily basis. It’s nice, because you don’t really notice in your cash flow management compared to having to try to find a certain amount every month that you may not have. The amount of credit card revenue you make goes to the credit card processor, then with your loan, 10% gets taken out and that 10% gets sent to the cash advance company, and the rest will be sent to you. This process continues until the loan is paid off.
- Higher Rates- The rates on a cash advance will be higher than those at the bank, but this is because of the no personal guarantee and how fast you receive the money.
- Short Term- This is the real issue with cash advance companies. Usually, your business only has 3 to 4 months to pay the money back. If you get a $20,000 cash advance and need to pay a third of that every month, this will take away all of your credit card processing revenue and will end up hurting your cash flow. I do not recommend getting the 3 to 4 month cash advances, even though sometimes you may get a slightly lower factor rate. It’s not worth messing up your cash flow over the next few months.
What we offer with Strategic Funding is a 10 or 12 month program. This means that you would be paying the cash advance back over a 10 to 12 month time frame, making it a lot easier for you. We base your time frame off of the average amount of credit card processing revenue your business makes per month. Its always about the percent. This type of program is beneficial to a business owner because if you have a week where your revenue is 30% down, your loan payment will also be down 30%.
Now, let me explain a factor rate. This isn’t really a loan. Depending on how much risk the cash advance company is taking on and the time period of repayment, that will determine your factor rate. The rate will usually be between 1.3 and 1.4. In other words, if you borrow $10,000 and your factor rate is 1.3, you will end up paying $13,000 back over 10 months. So, the company will withhold 13% out of every day’s “batch.”
With our company, we stand out from our competitors with the term of repayment we provide. Usually, interest rates are about the same, but instead of having to pay back $13,000 within only 3 to 4 months, you can pay back the same amount of money within 10 to 12 months. You then get to keep more of your cash flow while you’re paying back the cash advance.
If you have any questions, go to transactionexpert.com/cash. Just fill out the form and we will get you in touch with one of our in house cash advance experts that same business day. I know if you are interested in a cash advance, you need the money now. Our goal is to get the money into your account within 3 to 5 business days of filling out the form, so we can get you a cash advance that meets your business’ needs.