Times are always changing and recently, Merchant Cash Advances or MCAs, have increased in popularity. The concept initially was used to try to tackle the problem of credit cards. It has evolved into an option for organizations to finance sales of their products and services. A simplified version of this concept is a business cash advance, which can serve as a quick and short-term financial solution to help with money issues. Repayment begins shortly after the loan and needs to be paid back within a few months. It falls into the category of a future asset sale instead of a loan.
Types of Sales
Originally cash advances used to be for selling credit cards, and this is still true. They’re typically easier for lenders to offer because they receive direct payment dependent on how future sales go. Repayment varies from one situation to another but follows a trend.
How much money?
The lender evaluates your current situation and examines your past sales to predict how your future sales will go. They will look at your bank or credit card statements as one factor to decide how much money to finance. Expect anywhere from 80 to 150 percent of how many sales you make each month depending on the lender and other influential factors, such as an overall evaluation of your business.
The amount to pay back includes however much you borrow with an addition of nine to 50 percent. The range varies significantly and indicated by lenders as either 1.05 for a five percent interest rate, or 1.5 for a 50 percent rate for example. If you were to borrow $100,000 at 1.1, you’d pay back a total of $110,000 to the lender. The time you’re given to repay the loan amount back to the lender ranges from three to 15 months. It results in higher monthly payments since the repayment period is so short.
Paying it back
You need to pay the loan back for a cash advance just like with a regular loan. You might need to show your daily revenue with the lender to keep them informed of the current sales if the loan was dependent upon credit card sales. The lender charges a retrieval rate as well, which can be anywhere from eight to 13 percent and uses the same processor used for your card transactions. Regular cash advances debit the funds from your bank account.
Factors to keep in mind
A firm with constant cash-flow issues should not utilize this option as a way to get out of financial problems. It can be harder to make the minimum payments and cause you to get into even deeper debt. It can also be costly to pay the fees if you don’t have a long-term solution in mind. It is easier to get a cash advance loan than a traditional bank loan but should be done for the right reasons and only if you have a long-term solution to pay the debt off. Carefully consider whether this would be a reasonable solution for your financial circumstances.