As a business owner, there are all kinds of challenges your company will face over the years. Some will be relatively simple to overcome, while others prove to be much more trying and in-depth. One of the most common issues that business owners have is a healthy cash flow. The cash flow is important because that’s what is used to pay all the monthly bills. It covers things such as wages, taxes, and rent among other things, all of which keep the business afloat.
If your company has been experiencing cash flow issues, you may be looking at various options that can help with the challenge. One of those could be a merchant cash advance. While merchant cash advances aren’t anything new, it doesn’t mean every business owner is aware of what they are and how they may be able to help. So, let’s take a look at all you need to know about merchant cash advances.
What is a Merchant Cash Advance?
As mentioned, merchant cash advances aren’t anything new, but they aren’t always fully understood. This is a practice whereby the business owner who normally accepts credit card payments from customers/clients can use those future funds as an advance. It is essentially an advance that is based on future sales or revenues in your business.
What this means is that it’s not a business loan, as you aren’t going to the bank to seek approval for a loan. At the same time, you will need to have an established and steady income sourcing from those credit card sales. The advance is provided through an MCA provider – or a merchant cash advance provider.
What is a Factor Rate?
The deeper you dig into these styles of advances, the more you’ll come to discover there is a “fee” of sorts that is involved. With a traditional business loan, you would pay an interest rate. Cash advances work a little different and instead use a factor rate. Understanding factor rates is important to do before you go ahead and enter an agreement, as this will determine how much extra you are paying back on that initial cash advance.
A factor rate is actually a fixed factor cost that is a decimal. The factor rate ranges from 1.1 to 1.5 and then you use that rate to multiply it against whatever you have borrowed as the cash advance. The total will reflect not just the amount borrowed, but how much extra you will pay back.
With a simple equation, you can use the factor rate of 1.25 applied to a cash advance of $15,000. What that means is that you would pay back a total of $18,750.
Typically this is a much easier formula to figure out than interest rates which are accrued and therefore not a fixed cost.
Entering into the Merchant Cash Advance Informed
By taking the time to learn all there is about merchant cash advances, it will help you to make the best decision possible for your business and its future.
