There are some industries that need extra capital to make their businesses work more efficiently in order to produce more income. But when they apply for a loan in a bank, it will take so much time and energy before it will be approved. Not to mention the fact that sometimes, loan applications are being denied. When this situation will arise, merchant cash advance funding can provide a solution to the business owners. But with numerous merchant cash advance companies, it would be better to consider the following factors in choosing whom to apply.
Factor Rate
Factor rate is the markup that the merchant cash advance provider will charge. Every business cash providers have different factor rate so as a borrower you should consider this as one of your basis in choosing your provider. A factor rate, which is expressed in decimal figure, typically ranges from 1.00 to 1.5. This will depend on some factors such as: what type is the industry, how long is it operating, how stable are the sales, and what the average of the monthly credit card sales is.
The funds that you will receive from a merchant cash advance will be multiplied to a factor rate in order to determine the total amount that you will be paying back. For example, if you are going to borrow money amounting to $15,000 at a factor rate of 1.30, you will be paying back a total amount of $19,500.
$15,000 x 1.30 = 19,500
Where: $15,000 is the loan amount
1.30 is the factor rate
$19,500 is the repayment.
Note that when you say factor rate, it is not the same as the interest rate. With factor rate, the time frame is not considered unlike with the interest rate wherein the client must pay the capital plus the interest in due time. With merchant cash advance you are not obliged to pay the fix amount monthly. It will be depended on the performance of your business. When you have high revenue, then the provider will deduct higher from your debit/credit card.
When applying for a merchant cash advance, the financing companies are determining the factor rate that will be applied basing on the following figures:
Processing of Credit Card Statements
The merchant cash advance company will base the factor rate on the history of your credit card sales. Usually, they will be asking the credit card statement for the past three months.
Statement Business Bank
In here, the cash provider will only verify the financial status of your business.
Years of Business Operation
The financing company want to know since when did your business operate.
Tax Return of Your Business
In order to have an idea of how did your business run, the financial provider want to see you latest business tax.
Deduction Percentage
In merchant cash advance, Deduction Percentage is often called as retrieval rate. It is the portion of the sales that will be deducted from the client’s credit or debit card to be forwarded to the account of the merchant cash advance loan providers who provided the fund. This percentage is varying but is generally ranging from five percent to twenty five percent (5% – 25%). One of the bases of the deduction percentage that will be applied to your cash advance will depend on how big is the fund you are requesting. And one more thing, you should bear in mind that the percentage rate is predetermined in the contract and is not subject to change.
In merchant cash advance industry, you are not obliged to pay a fix amount every payment schedule. It will depend on the fixed percentage of your credit or debit card sales. It will be your sales multiplied to the deduction percentage agreed on the terms and conditions of the contract. So, if you have an accumulated credit or debit sales of $30,000 on that particular month with a deduction percentage of 10%, the $3,000 will go to the account of the cash provider.
Like other lending institutions, merchant cash advance has terms and conditions that should be agreed upon by both the provider and the client. One of the terms that should be understood is that you are giving merchant cash advance provider the permission to work with your credit card processor or to your bank from the moment you agree with their terms and conditions. They are allowed to retrieve from your account the amount that is due based on the arranged rate deducted. After the amount due is paid to the cash advance provider, all the left amount will go back to your company’s account. This means that the transaction for repayment is not already in your control.
Payment Period
The payment period is the length of time that you should be able to repay the full amount provided by the merchant cash advance provider. However, this is just estimated because the schedule of your payment will depend on the income of your business. If you have higher sales, you will be paying back higher amount.
In choosing which merchant cash advance firms you are going to apply, you should also consider your estimated repayment time. The terms are not the same but the average is about 8 months. Some terms are less than that and some are up to 24 months so you have the option to decide what terms you are financially comfortable with.
Payment Frequency
The term Payment Frequency in merchant cash advance refers to how often the client will repay the provider. This is scheduled based on the agreed terms and conditions set by the cash provider.
Upon signing the agreement with the merchant cash advance provider, they are allowed to be the one to take the certain percentage from your credit card sales, usually on a daily basis, until you have fully repaid the cash advance they provided plus the amount added produced by the factor rate.
Since the merchant cash advance will require you to repay daily, you should cautiously evaluate first your finances if you can manage to do this option.
In order for you to fully understand these features mentioned above, here is an example.
You have a business but because of some unavoidable circumstances, you are desperate to find funds to purchase the need of your business in order to continue its operation. But since you are not qualified to apply a loan in a commercial bank, you decided to borrow money in a one of the best merchant cash advance loan providers. From the provider, you obtain a cash advance of $80,000 with a factor rate of 1.30. The condition of the merchant cash advance business is that your sale will have a deduction rate or retrieval rate of 10% with an expected payment period of 12 months. In totality, you are to pay back a total of $104,000 at the end of 12 months. This is what they call total repayment amount. In order to complete the repayment on time, you have to pay an average or at least $285 a day ($104,000 ÷ 365 days). Meaning, you must have an average credit card sales of at least $2850 in order to repay $ 285 a day. But even if you repay an amount higher than $285 in a day, still you have to pay the full amount of $104,000.
The following table will present the summary of the merchant cash advance terms and features presented above:
| Features | Low | Average | High Range |
| Amount, $ | Up to $250,000 | Up to $500,000 | Up to $2 Million |
| Factor Rate, % | 1.00 | Varies by business | 1.50 |
| Deduction Percentage, % | 5% of sales | 10% – 20% of sales | 25% of sales |
| Payment Period, Months | 3 | 12 | 24 |
| Payment Frequency | Monthly | Daily or weekly | Daily |
Having filled up with the necessary information that you need to know when looking for the merchant cash advance provider who will help you solve your monetary issues, it is time for you to think before you act. If you need cash as soon as possible, think of the potential outcomes of your action. Is it really worth it to avail funds from merchant cash advance providers? Will it really benefit your business such that you will not end up indebted for a long time with greater annual interests? Does it really make sense finding yourself in an easy way of funding? Well, the answer is in your hands. It is your business so you really have to carefully go back to your business goals and status of your business financials. Just keep in mind that this could be the most expensive funding option you could ever choose from. Have a smart choice so as to push through with your business venture.
Take time to browse several merchant cash advance loan provider reviews before making an arrangement. It is essential that merchants form a solid partnership with the provider to gain the financing you need. Look for vital information relative to your provider who is able to offer your monetary needs.
Dare to step in with easy funding option? Find the best merchant cash advance companies listed at CrowdReviews.com to provide your monetary concerns.
John Tovar
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