The Merchant Cash Advance is a rapidly growing source of alternative working capital for small businesses. With a Merchant Cash Advance, a merchant sells a percentage of his or her future credit card receipts in exchange for an upfront lump sum amount.
Here’s how it works:
Let’s say your business does $10,000 a month in credit card sales and a funding company is willing to purchase 20% of those receipts over the next 7 months. Under this scenario, you could be expected to bring in $70,000 over 7 months. 20% of $70,000 is $14,000. The funding company would then divide that $14,000 by a factor rate (typically around 1.35 for a 7 month program) to come up with the lump sum amount you would receive. In this case, the upfront amount would be approximately $10,370.00
So, you would get $10,370 wired into your account in as little as 7 to 10 business days vs. waiting for that money to come thru your door in increments over the next 7 months. Many business owners find it helpful to have a lump sum of money on hand for a number of reasons, including tackling necessary renovations, paying taxes or ordering inventory.
The collection process for a Cash Advance is completely automated as the funding company will add their rates (20% in this example) to your credit card processing rates. Then, each evening when you batch out your processing receipts – 20% will automatically be deducted and sent to the funding company until the entire payback amount($14,000) is collected. The remaining 80% would go to your account as it normally would. No fixed monthly payments (no checks to write), no hidden fees, no late fees, etc… (IF you are working with a reputable company!!!)
Other positive aspects of the Merchant Cash Advance include:
1.) A Merchant Cash Advance is unsecured. That’s right. There is no collateral involved. Therefore, if you default or fall behind thru no fault of your own, you won’t lose your home or other personal assets.
2.) A Merchant Cash Advance won’t show up on your credit as an outstanding loan or line of credit. Why? Because it ISN’T a loan or line or credit. This type of agreement represents a True Sale in that an asset is sold for an agreed upon price. The asset in this case is a percentage of your future Visa and Mastercard sales. The price is what the funding company is willing to give you now in exchange for the final payback amount.
3.) Your eligibility does NOT live and die by your FICO score. It is a consideration in the overall underwriting process – it is just one of MANY factors that are evaluated. A low credit score may account for anywhere from 5 to 15% of the decision, but it can be overcome if the underlying mechanics of the business itself are strong.
There are also a number of drawbacks related to the Merchant Cash Advance. Check back tomorrow to find out what they are and to see if this type of funding might make sense for your business.
Til Then,
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