Merchant cash advances provide small business owners with an alternative financing option separate from traditional bank loans. Business owners receive financing upfront from a merchant cash advance provider and pay for the advance with a percentage of the business’s daily sales. Merchant cash advances are a good option for small business owners that collect payments through cash, checks or credit cards (as opposed to invoices), have a high volume of sales, need funding quickly or may not qualify for a traditional bank loan.
How Does a Merchant Cash Advance Work?
Merchant cash advances provide funds to small business owners in exchange for a percentage of the business’s income (usually credit card transactions) over time. Payments are generally made daily (and automatically) using a percentage of the business’s daily credit card income. The total amount to be repaid is calculated by a “factor rate,” which is a multiplier generally based on a business’s financial status.
For example, John owns a seafood restaurant business in New York and has a big event coming up in a week that can make or break his business. Due to a recent storm, John’s normal seafood supplier was unable to fulfill John’s last order. John is desperate and finds another seafood supplier, who can fulfill his order for three times the normal price.
John’s business accounts do not have enough money to pay for the price increase and he does not qualify for another small business loan. He decides to obtain a merchant cash advance for $100,000 with a factor fee of 1.25%. The terms of the merchant cash advance are that John will repay the loan with 10% of his daily credit card sales for up to 12 months.
John would end up paying a total of $125,000 ($100,000 principal x 1.25 factor rate) at the end of 12 months. John would need to pay on average slightly less than $350 a day ($125,000 ÷ 365 days). This would be equal to 10% of his daily credit card income, meaning John should average around $3,500 per day in credit card sales. John could potentially pay off the advance sooner if his daily credit card income is higher than usual, but he would still have to pay the full amount of $125,000.
Merchant Cash Advance Terms and Features
Merchant cash advances offer small business owners a quick and easy method to get funding immediately. The application process can usually be completed and approved within one day. There’s a very high approval rate and funding is usually available within a day or two. In addition, unlike many traditional business loans, merchant cash advances do not require collateral. The table below has more information on the terms and features of merchant cash advances.
|Low Range||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||3 months||12 months||24 months|
|Payment Frequency||Monthly||Daily or Weekly||Daily|
Small business owners should be aware, however, that one of the major disadvantages to obtaining a merchant cash advance is that they are usually pricier than a traditional small business loan. Merchant cash advances generally cost 20% to 50% more than the principal amount. In addition, because merchant cash advances are treated as commercial transactions and not loans, there is no federal oversight in the form of regulations and enforcement. Without federal oversight, there’s no check to predatory lending practices. It is important for small business owners to really assess their particular circumstances and determine if they need and can afford a merchant cash advance.
How to Qualify for a Merchant Cash Advance
The good news is that qualifying for a merchant cash advance is relatively easy. Most providers offer an easy online application with quick turnaround times. Unlike traditional business loans, applicants do not necessarily need to have multiple years operating as a business to qualify. While a lengthy operating history and good credit can help applicants obtain favorable payment terms, a short operating history and poor to average credit won't necessarily preclude applicants. One factor that providers look at closely is whether the business has had a consistently high sales volume. While there is no magic figure, most providers will only advance 75%-250% of a business’s monthly sales volume.
Small business owners seeking to apply should be prepared to submit official photo identification, business tax returns, bank account statements, credit card processing statements and credit check authorization.
Merchant Cash Advance Companies
There are countless providers that offer merchant cash advances with quick and easy online applications, and we’ve listed a few below.
RapidAdvance offers two types of merchant cash advances for business owners. The basic account type requires at least three months of credit card processing history and allows for funding up to 50% of the business’s average monthly credit card sales volume. The upgraded account requires businesses to have been in operation for at least three years and allows for funding up to 85% - 250% of the business’s monthly credit card sales volume. Small business owners can apply over the phone or online. Applications can be approved in 24 hours and accounts funded in as few as three days.
CAN Capital offers merchant cash advances in amounts from $5,000 to $150,000. Business will need to have been in operation for at least three months and have annual revenue of at least $100,000. The online application process is quick and accounts are usually funded within a couple of days.
BFS Capital offers two types of merchant cash advances in amounts from $4,000 to $2 million. The basic account type requires that businesses have fair to average credit, been in operation for at least nine months and have at least $4,000 in monthly credit card sales volume. The upgraded account type requires that businesses have excellent credit, been in operation for at least two years and have at least $4,000 in monthly credit card sales volume. The basic account allows for repayment up to nine months, while the upgraded account allows for repayment up to 18 months with more favorable terms. Business owners can apply online and expect funding within a few days if approved.
Capify offers merchant cash advances in amounts from $5,000 to $1 million. Businesses will need at least two months of credit cart processing history and at least $5,000 in monthly credit card sales volume. Business owners can apply over the phone or online. Decisions are made within a few minutes and accounts are funded within a few days.
Compare Small Business Loans