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It can be tough starting a small business. If you have bad credit or outstanding invoices, how do you create a business that generates the income you need to pay off your debts?
If small business loans and other types of business credit are out of your reach, one alternative method of financing is a merchant cash advance (MCA). With an MCA, your business gets cash upfront in exchange for a portion of your future sales.
Merchant cash advances promise a quick infusion of cash into your business. An MCA could also help you stay afloat in troubled times, but there are downsides to getting fast money. In this article, we will explain this method of financing so you can decide if it’s right for your business or not.
How Does a Merchant Cash Advance Work?
A merchant cash advance is a sum of money the provider gives you upfront. In return, the provider gets a predetermined amount of your future earnings.
Is a Merchant Cash Advance a Loan?
Technically speaking, a merchant cash advance is not a loan.
With loans, the bank lends you money, and you make regular repayments on the principal, along with interest.
With merchant cash advances, the lender provides you with cash upfront. Then, the lender automatically deducts a predetermined percentage of your daily credit and debit card sales, along with an additional fee. Some MCA lenders also accept cash by using Automated Clearing House (ACH) to make regular withdrawals from your bank account.
The lender will continue to take a cut of your sales until the entire advance they provided you has been repaid in full.
Cash Advance Fees
Merchant cash advances carry fees. The exact fee amount varies based on the lender’s judgment of your ability to repay. To calculate your fees, the lender determines a factor rate based on your creditworthiness. This rate is multiplied by your cash advance amount to determine your final repayment amount.
For example, let’s say that you need $10,000 and your provider assigns you a factor rate of 1.5. That means that you will need to repay a total of $15,000.
Compare MCAs With Loans By Calculating Interest Rates
It’s important to understand the true cost of the money you’re getting from an MCA, especially if you’re also considering alternative financing via a loan or credit line. Since loans and credit lines have interest rates (APR), you must calculate the equivalent for any MCA you’re considering.
For our loan example above, the effective APR over the course of a year, works out like this:
Calculating the interest rate provides business owners with an insight into how much an MCA actually costs, but varies on the individual repayment structure of the contract.
If you do qualify for loans, calculating the interest rate of your MCA based on the terms provided makes it possible for you to compare the cost of multiple financial products.
When it comes time to repayments, the amount withdrawn from your account varies based on the structure of your Merchant Cash Advance (i.e., the length of time allowed for repayment and where the repayment funds are coming from.)
Fixed Repayment: Your lender can request that you make regular payments. For example, you can agree to repay them $4 per day (or $120 every thirty business days) for one year.
Percentage of Sales: Your lender may opt to take a percentage of your sales (e.g., 5% of sales) for a specified period. With a percentage, the amount you pay varies. In slow months, you’ll pay less, but your overall repayment time will be longer. In busier months, you’ll pay more, leading to a shortened overall repayment period.
Qualifying for a Merchant Cash Advance
One of the upsides of a merchant cash advance is that the application process is fast and easy. The specific steps required vary based on the provider, but you can expect to:
- Fill out an application
- Provide documentation regarding your monthly income, typically with bank statements. If you are paying your MCA back with a portion of your credit card transactions, you’ll also need to provide your credit card processing statements.
- Agree to a credit check
In general, the application process occurs online and you will usually receive a response the day you apply. Funding occurs soon afterward — the point of an MCA is to get cash to you quickly.
Merchant Cash Advance Versus Alternative Funding
There are other ways to borrow money or increase cash flow other than MCAs and traditional loans.
It is best to familiarize yourself with all available avenues in getting quick cash for your business. Here are the most popular MCA alternatives, and below, you can see how they all differ from one another:
- Business Line of Credit (BLoC): a set sum of cash with maximum borrow limit. You only pay interest on the borrowed sum.
- Term Loan: a specific sum of money, often borrowed by small businesses. There are specific schedules for repayment, along with floating or variable interest rates.
- Invoice Factoring: a way for your business to increase cash flow if you have unpaid invoices. You sell your invoices for early payment for a set fee.
Now let’s get a little more numerical. How do these options compare to one another when we take numbers into account? Which cash-grab method is the cheapest, and most economic funding choice for your business?
|Merchant Cash Advance||Business Line-of-Credit (BLoC)||Term Loan||Invoice Factoring|
|How Does It Work?||Cash for a portion of future sales||Fixed amount available. Borrow and pay as you go||Traditional loan offered by banks||Unpaid invoices turned to cash|
|Borrowing Limit||$50,000 to $2m||$1,000 to $250,000||Over $250,000||$10,000 to $5m|
|Interest Rates||Fixed||Fixed or floating||Fixed or floating||Fixed or floating|
|Approval Speed||As fast as 24hrs||As fast as 24hrs||As fast as 24hrs||As fast as 24hrs|
Recommended Companies for Merchant Cash Advances
If you are in the market for a merchant cash advance, two providers you may consider include Fundbox and Bluevine. Here is a quick side-by-side comparison of the two, before we explore specific details.
Fundbox specializes in fast, easy funding for small businesses. Their average customer earns over $250,000 per year and has been operating for at least one year.
To apply for an advance, you connect either your accounting software or your business bank account so that Fundbox gets an idea of your business’s financial situation. Fundbox promises a decision in under three minutes. If you’re approved, you will have access to withdrawals no later than the next business day.
Repayments occur weekly over a period of 12 or 24 weeks. Each week, the amount you repay (less the fees) becomes available again. If you repay early, Fundbox will waive any remaining fees.
How to Qualify For a Fundbox Merchant Cash Advance
To qualify for an advance from Fundbox, you will need:
- A business checking account
- Two or more months’ worth of activity in your accounting software or at least three months’ of transactions in your business bank account
- At least $50,000 in annual revenue (business operating for 6 months or longer with revenues under $50,000 may still qualify)
- A business based in the US or a US territory
Whilst Bluevine doesn’t offer merchant cash advance, they do offer a Term Loans, BLOCs, and Invoice Factoring. Bluevine’s loan ranges are from $5,000 to $5,000,000, with the lowest rates starting at 4.8% APR and approvals as fast as 5 minutes.
Bluevine’s Invoice Factoring
If businesses or customers fail to pay your business on time and leave you in a financial pickle, Bluevine will advance your invoices for you. They charge a fee for this service, approval in as fast as 24 hours, with rates starting at 0.25% per week (subject to LIBOR rates.)
With Bluevine’s Term Loan, you will receive fast funds up to $250,000, and repay a fixed weekly rate over six or twelve months (which Bluevine automatically withdraws from your account).
How to Qualify For A Bluevine’s Term Loan
If you meet the following qualifications, Bluevine will consider working with you:
- A credit score of 600 or higher
- At least six months in business
- At least $100,000 in annual revenue
Applications are done online, and you have to provide basic information about your business, along with a bank connection, or your three most recent bank statements. Additionally, the application will not impact your credit score. Decisions can be made in as little as 5 minutes with funding occurring just a few hours later.
Bluevine offers loans up to $250,000 with rates as low as 4.8% (in this case, based on simple interest rate calculations on repayments over 26 weeks).
This type of business credit doesn’t come cheap, but if you are in a tight spot, they can help tide you over until your business’ financial situation improves.
If you are a business owner and the traditional methods of business financing are closed to you, consider a merchant cash advance or one of the alternatives:
- Business Line-of-Credit
- Term Loan
- Invoice Factoring