Merchant Cash Advance
Merchant Cash Advance providers have become part of a burgeoning group of financial lenders over the past ten years. The number of SME (small business enterprise) startups coupled with a tight credit environment, is the reason for high demand for short-term investment globally.
The Merchant Cash Advance is a “purchase and sale of future income” and not a loan. They are not ruled or bound by regulatory bodies, and there is no limit to the interest rates they are allowed to charge.
Typically “merchants” such as restaurants, retail, and service companies with large credit card sales, who have poor credit or no collateral, can make use of this type of funding.
The advice to all potential businesses who wish to participate in Merchant Cash Advance as a way of injecting cash for business growth is to be confident that their sales and therefore business, can withstand a” loan without end,” at high-interest rates.
Most companies who lend in this manner are intent on keeping the merchant company healthy. If a business goes under, the lender takes the loss.
How Does it Work?
– The cash is provided to the merchant business as a lump sum to be paid back as a share of future sales or future income.
– Interest rates vary from 60% to 200% APR. There are merchant cash advance companies who do take a responsible attitude and only charge between 8% and 10% of gross sales, particularly when the merchant business has low-profit margins.
– The lending company receives a regular (daily) fixed payment which is directly tied to the merchant’s (credit card) sales until the cash advance is paid off.
– The length of the loan can be less than 12 months and the amount paid back is tacked on to daily credit card income, so varies, as a percentage of sales plus interest.
– There is no fixed payment and therefore, no fixed “end date.”
Pros and Cons of Merchant Cash Advance
- Flexible terms, repay the funding based on future sales
- No need to give away equity in your business
- You know total amount to be repaid from the outset – No fees, penalties or hidden charges
- You keep 100% of your cash income
- In slow times, you pay back less and in good times you pay back more
- Relatively high loan cost