Typically, cash advance loans have a shorter repayment period compared with other business financing options, as well as smaller and more frequent payments.
While cash advance loans are useful as a quick funding solution, they are normally reserved as a fallback plan if a business faces a tough financial situation without any alternative method of obtaining money. The reason small business cash advances are treated as a last-case-scenario is that the interest rates are notably higher than other types of business loans.
How does a merchant cash advance work?
A merchant cash advance is a sum of money which your card machine provider offers you as a lump sum, in exchange for a set amount of your future earnings. These repayments are normally taken automatically.
Are merchant cash advances loans?
With loans, the bank or other financial institution lends you money. You then make regular repayments of this money, along with a predetermined interest rate.
Like a loan, you get the agreed some of money up front in a merchant cash advance. Unlike a loan, the lender automatically deducts a predetermined percentage of your daily credit and debit card sales. They might also charge additional fees on top of this. Alternatively, some merchant cash advances allow the borrower to make cash repayments, for example through your bank account.
Once you have repaid the lender, they’ll stop taking the agreed cut of your transactions, and you’ll revert back to your normal service arrangement.
Fees for merchant cash advances
Of course, card providers don’t offer cash advances out of the kindness of their own hearts. Rather, you’ll have to pay back more than you borrowed.
The lender will take your cashflow, assets, and how long they think it’ll take you to pay back the loan when assessing how much you’ll have to pay back. They then calculate what’ known as a factor rate. This is a decimal which determines the final amount you’ll pay back.
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.
How do you repay a merchant cash advance?
When it comes time to repayments, the amount withdrawn from your account varies based on what you agreed with the lender. There are essentially two common repayment plans for merchant cash advances.
Fixed Repayment: Your lender can request that you make regular payments. Here, there will be a set amount you’ll have to pay for a given time period. For example, €100 per month, for 18 months.
Percentage of Sales: Your lender may opt to take a percentage of your sales for a specified period, or until your advance is paid back in full With a percentage, the amount you pay varies. This is a popular option, especially with smaller merchants, as it can make repayments more manageable. That is, you’ll make smaller repayments in months where you make fewer sales.
If you’d like to find out more about merchant cash advances, or any other kind of business financing, contact LoanGuru today.