Cash Advance

Find out all about a merchant cash advance, and whether it is a good fit for your business needs.

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A merchant cash advance isn’t a loan, but a lump sum advance payment based on your credit card transactions. Through a provider, you’ll obtain an advance payment, which will be repaid (along with a fee) with a percentage of your daily or weekly credit card sales.

The fees that you pay back are determined by a factor rate. While the factor rate will vary across merchant cash advance providers, it typically falls within the range of 1.1 to 1.5. Multiply the factor rate with your loan amount, and you’ll obtain the total amount that you need to repay. On a daily or weekly basis, your provider collects the holdback. This refers to the percentage of your credit card sales that are withheld to pay off your cash advance.

Here’s an example: if the merchant cash advance you’ve received has a holdback rate of 10 percent, it means that your provider will receive 10 percent of your credit card receipts every day (or week) until the full repayment has been made. Holdback rates can vary widely across providers; the average rate is around 10 to 20 percent, but can range from eight percent to as high as 30 percent.

How can a cash advance help my business?

A business cash advance is a great option for businesses in need of a short term financing tool. It can be used to fund a variety of business needs, such as unexpected expenses, inventory purchases, cash flow gaps due to seasonal fluctuations and marketing activities.

Is a cash advance right for my business?

The following are general requirements that can help you assess if a merchant cash advance is a good fit for your business:

  • You receive the majority of your payments through credit cards: Businesses that receive the majority of their payments through credit cards are a good fit for merchant cash advances. Examples include restaurants, retail businesses and beauty salons.

  • You’re running a seasonal business: Instead of paying off a fixed sum, your repayments are based on your daily or weekly credit card receipts. This can be a boon for seasonal businesses, since paying off a smaller sum during lull periods will help ease the strain on your cash flow.

  • You require quick access to funding: Compared to the drawn-out application and onboarding processes typical of banks and traditional lenders, merchant cash advance providers may approve your application within hours, and provide access to funding within a few days. This makes it a great option where financing is needed urgently, such as when unexpected expenses crop up or when you require funding to take advantage of time-sensitive business opportunities.

  • You don’t qualify for traditional loans:Merchant cash advance providers are most concerned about the volume and consistency of your sales, and have less stringent criteria compared to traditional lenders; in general, collateral isn’t required and credit checks aren’t performed. As such, a merchant cash advance can be a viable option for small businesses or newly established ventures without an established credit history, or don’t meet the lending criteria imposed by traditional lenders.

Tips to help you prepare for your cash advance application

Ask for weekly payments

While most merchant cash advance providers require daily payments, there are certain companies that offer alternative repayment schedules. Merchant cash advances are one of the most expensive forms of small business financing - and coupled with a daily repayment schedule can easily create cash flow strains for your business. As such, it’s best to opt for weekly payments where possible.

Apply at the right time

If you’ve only just begun to accept credit card payments, or are a newly established venture, it’s best to wait to apply for a merchant cash advance when your credit card payment history is more established. In this way, you’ll stand a better chance of getting approved or obtaining favourable repayment terms.

Beware of falling into a debt trap

Merchant cash advance carry hefty fees and charges, and depending on the fees and how long it takes for the debt to be paid off, businesses may wind up paying annual percentage rates (APR) that go up to a three-figure sum. Things can quickly spiral out of control if business owners aren’t able to keep up with the payments - and often, they may end up taking out multiple cash advances in succession in order to pay off outstanding balance on previous advances.

Entrepreneur Joe Ruvacalba is a case in point. In a CNN Business article, Ruvacalba elaborates on how he had taken out five cash advances for his plumbing company at a point in time, and was making daily repayments that amounted to about $5,000. He advises: “As an owner, you have to ask yourself: 'Can I handle this payment every day?' And if you can't, don't get it.“

What are small business financing options I can explore?

Merchant cash advances may have been one of the few options for small business owners who don’t qualify for traditional loans in the past. But with the rise of alternative lenders, small business owners now have a wider variety of external financing solutions to choose from - including short term loans, invoice financing and lines of credit.

With Aspire, loan application processes are convenient, streamlined and speedy - submitting an application takes a matter of minutes, and you’ll be notified of your loan approval status in just 24 hours.

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