Merchant Cash Advance – How Good Is It For Business?

Nov 14, 2023

Key Takeaways:

1. A Merchant Cash Advance offers quick capital for businesses, with repayment structured as a portion of their forthcoming credit and debit card sales.
2. While it may seem like a good option for quick cash, its ” fee ” can be pretty hefty, and the repayment terms may not be as flexible as you’d like. Therefore, it’s essential to understand all the pros and cons before considering a Merchant Cash Advance.
3. A Merchant Cash Advance is typically not a loan; it’s like a company buying a piece of a business’s future sales.
4. Repayment for the advance can be executed through either a percentage of credit and debit card sales or fixed payments debited directly from the business’s bank account.
5.  The factor rate, which ranges from 1.1 to 1.5, denotes the fundamental cost associated with the advance. However, additional fees such as administrative or underwriting fees will increase the total cost of the financing.
6. It’s important to understand all the fees associated with a Merchant Cash Advance and factor them into the total cost before deciding to pursue it.

Running a business can feel like an endless game of financial whack-a-mole, where you try to knock down expenses as they pop up, but they keep coming back with a vengeance. It’s a never-ending cycle of juggling bills and cash flow, which can be exhausting. That’s where the idea of a merchant cash advance comes in.

But it’s essential to understand a merchant cash advance and how it works. Essentially, it’s a lump sum of cash that a lender provides to a business in exchange for a percentage of their future credit and debit card sales.

 It’s a way for businesses to access quick cash without going through the traditional loan application process. But is it worth it? Read on as 7 Figures Funding discusses how good (or not) a merchant cash advance can be for your business.

Getting Your Grip on Merchant Cash Advance 

Picture this: You’re sitting stressed at your desk, staring at the pile of bills and invoices, wondering how you will pay them. Abruptly, you hear a knock at the door and open it to find a well-dressed person holding a briefcase. “I’m here to offer you a merchant cash advance,” he says with a smile. “It’s an alternative business financing, not a traditional small business loan. We’ll give you an upfront sum of cash, and you pay us back using a percentage of your debit & credit card sales, plus a fee.”

At first, it sounds like a dream come true – quick cash without all the hassle of traditional loans. But before you start high-fiving your coworkers, it’s important to understand the fine print. That “fee” the slick-looking dude mentioned? It can be pretty hefty, and the repayment terms may not be as flexible as you’d like. Plus, you could struggle to pay if your sales take a hit.

So, while a merchant cash advance might seem tempting, it’s essential to research and ensure you understand all the potential pros and cons. After all, you don’t want to get a bigger headache than the pile of bills on your desk.

How Merchant Cash Advance Works?

A merchant cash advance is a financial product that offers businesses a lump sum of capital in exchange for a percentage of their future credit card sales or daily bank deposits. Businesses repay the advance and a fee by automatically deducting a fixed percentage from their daily sales. This repayment structure is designed to align with the company’s cash flow, making it particularly suitable for businesses with fluctuating revenue. Merchant cash advances provide quick access to funds but tend to have higher fees than traditional loans, making them a costly financing option.

A Couple of Ways You Can Pay It Back

The first is having the provider take a percentage of your credit & debit card sales each day or week until the advance is paid off. Alternatively, fixed payments are withdrawn directly from your bank account. This option works well for businesses that don’t rely heavily on card sales and want to know precisely how long it will take to pay off the advance.

A merchant cash advance could be just what you need to take your business to a higher level. Ensure you understand all the terms and conditions before signing the dotted line.

Also Read Horrible Startup Funding Advice – Steer Clear Of These 12!

Merchant Cash Advance Rates and Fees

Merchant cash advance companies charge fees in the form of factor rates, which typically range from 1.1 to 1.5. However, the factor rate you receive will depend on the provider’s assessment of your business. If your ability to repay seems riskier, you’ll likely receive a higher factor rate and pay higher fees.

It’s important to note that the factor rate does not include any extra fees the merchant cash advance company may charge you for working with them, such as administrative or underwriting fees. These additional fees will increase the total cost of your financing, so read the fine print and understand all the fees associated with your merchant cash advance.

How To Calculate Your Merchant Cash Advance Amount?

Let’s say you’re a small business owner who needs $10,000 to purchase new equipment for your shop. You apply for a merchant cash advance and are approved with a factor rate 1.3. You’ll need to pay back $13,000 (the amount borrowed multiplied by the factor rate).

However, remember that the factor rate only represents the base cost of the advance. The total cost will also include any additional fees charged by the merchant cash advances company, such as administrative or underwriting fees.

Let’s say the merchant cash advance company also charges a 3% underwriting fee on top of the factor rate. That means you’ll need to pay an additional $300 in fees (3% of $10,000).

Your merchant cash advance would cost $13,300 ($10,000 x 1.3 + $300 in fees). It’s important to factor in all these costs when considering a merchant cash advance for your business.

Forget Merchant Cash Advance- Let 7 Figures Funding Help You

Starting a business can be like trying to run a marathon with a bowling ball strapped to your ankle. You have all these great ideas and big dreams, but finding the cash to make them happen can be a real challenge.

Unfortunately, most businesses fall short of their potential because they can’t secure the funding they need.

Leo Kanell, the founder of 7 Figures Funding, knows your struggle all too well. He’s been there, done that, and even got the t-shirt (which he probably had to fund himself). So, he made it his mission to help small businesses and startups get the financing they need to grow.

At 7 Figures Funding, we offer a different approach to traditional financing methods. We’re talking 0% credit lines and no collateral needed, like hitting the jackpot on the penny slots.

With years of experience and a proven track record, we’ve helped countless businesses in Phoenix, TX, achieve their goals and reach new heights.

Start now.