{"id":2721,"date":"2018-07-16T14:05:36","date_gmt":"2018-07-16T11:05:36","guid":{"rendered":"https:\/\/www.lending-express.com\/blog\/?p=2721"},"modified":"2019-02-06T11:43:42","modified_gmt":"2019-02-06T09:43:42","slug":"what-is-a-merchant-cash-advance","status":"publish","type":"post","link":"https:\/\/www.become.co\/blog\/what-is-a-merchant-cash-advance\/","title":{"rendered":"What Is A Merchant Cash Advance?"},"content":{"rendered":"

If you are a small-medium business owner and find yourself struggling through the business month, or perhaps just want to grow your business, a merchant cash advance could work as your shortcut to funding. This specific type of funding has minimal paperwork and application requirements making them easily accessible to the vast majority of business owners. Better yet, there\u2019s no possibility of late charges – keep reading to find out more and whether or not merchant cash advance loans are the right type of funding for your business…<\/span>
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How does merchant cash advance work?<\/span><\/h2>\n

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Here we\u2019ll detail what is merchant cash advance as well as how does merchant cash advance work…<\/span><\/p>\n

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Originally, merchant cash advances were designed to be a lump-sum payment that was to be exchanged for a certain agreed-upon percentage of future credit\/debit card sales. Nowadays, it\u2019s associated with an array of small business financing options with short and regular payment terms as opposed to larger and longer payment terms linked to traditional bank loans. <\/span><\/p>\n

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Most people think of a merchant cash advance as a loan, but merchant cash advance loans don\u2019t exist as they aren\u2019t a loan, to begin with. It\u2019s more of an advance (it\u2019s in the name!) or sale, on a business\u2019 credit card receipts, based on the future revenues or credit card sales. The cash in hand lump sum of funds provided is exchanged for a portion of the businesses daily future credit and debit card sales. <\/span><\/p>\n

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The Merchant Cash Advance Process:<\/span><\/h3>\n

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  1. Agree upon terms <\/b>– an agreement needs to first be made between the business and the provider regarding the terms (advance and payback amount as well as the holdback percentage – a fixed percentage the provider will take from your daily or weekly sales)<\/span><\/span><\/li>\n
  2. Transfer <\/b>– the advance is transferred to the business\u2019 bank account<\/span><\/span><\/li>\n
  3. \u201cHoldback\u201d<\/b> – the agreed upon percentage of the daily credit card receipts or revenue is withheld to pay back the merchant cash advance provider<\/span><\/span><\/li>\n
  4. Completion <\/b>– holdbacks will come to an end as soon as the daily withdrawals (advances) to the provider have been paid in full <\/span><\/li>\n<\/ol>\n

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    Merchant cash advance providers work with a partner credit card processor to ensure the daily holdback percentage is subtracted from the business and deposited into the provider’s account. You won\u2019t ever have to worry about falling behind on your payments as is possible with other types of loans, as the amount will automatically come out of your account on a daily (or weekly) basis and be in proportion to your earnings for that day. <\/span><\/p>\n

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    Merchant cash advance regulations – do they even exist?<\/span><\/h3>\n

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    One of the grey areas of merchant cash advances is highlighted in their regulations – or lack of, should we say. If you\u2019re wondering why there are no merchant cash advance regulations it\u2019s because it isn\u2019t actually a loan but rather a sale. If you think back to the definition of what a merchant cash advance actually is, you\u2019ll remember that the advance company or provider purchases your future credit card sales. It is this loophole that allows for them to be entirely regulation free.<\/span><\/p>\n

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    Being labeled as a sale or commercial transaction rather than a loan means being regulated by the <\/span>Uniform Commercial Code <\/span><\/a>unique to each state, rather than the banking laws like the Truth in Lending Act. Unlike other loans that are bound to <\/span>usury laws<\/span><\/a> (that protect consumers by governing the amount of interest charged on a loan and setting caps where needed), a merchant cash advance can simply fly-by these laws. So long as a merchant cash advance is referred to as a \u201csale\u201d (and not a loan), these state usury laws will not apply to them – giving way to a largely unregulated market. It is this unregulated market that allows for providers to charge interest rates more or less, as they please. <\/span><\/p>\n

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    How much does a merchant cash advance cost?<\/span><\/h2>\n

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    An average cash advance floats in the realms of $10,000-$1M – that\u2019s big bucks you gain access to if your business is in need, however, you must keep in mind that due to the lack of regulations, interest rates will be higher than regular loans. You can expect to pay back an average of 20-40% of the amount that you borrow. When you see these numbers you can expect to see them as a factor rate, so 20% would be 1.20 and 40% would be 1.40 for example. <\/span><\/p>\n

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    Working Example: <\/b><\/p>\n

    For every dollar that advances a business that has to be paid back $1.20 over the advance period. If your business receives a lump sum payment of $10,000 with a 1.20 factor rate, your business will have to pay the provider a sum total of $12,000:<\/span><\/p>\n

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    ($10,000) x (1.2) = $12,000<\/b><\/p>\n

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    As a business owner considering a merchant cash advance, you\u2019ll need to know the difference between the holdback and repayment rates – which are two separate things.<\/span><\/p>\n

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    1. Holdback:<\/b><\/p>\n

    This is the amount a business pays back every day (the percentage you agreed upon), with typical rates being in the realms of 8-30%. <\/span>
    \n<\/span>Holdback rates are based on:<\/span><\/p>\n