A common question from our potential clients is the cost of a merchant cash advance. There is a lot of information circulating the web about what a merchant cash advance will set a business back, and we want to take away a lot of the confusion surrounding this topic and help you understand how merchant cash advance providers calculate the costs and why the fees are where they are – and whether it is worthwhile for you.
The Basics Behind the Cost of Merchant Cash Advance Services
Here’s how it works – We advance you a certain amount of money, and we collect a different amount of money over time. We collect that amount by taking out a percentage of the debit and credit card sales that you collect every day. This is not a loan with a term; we simply keep taking out that same percentage each business day until you have satisfied the amount.
Now, you don’t receive as much in the advance as we collect over time. The difference can be as little as 20 percent and as great as 40 percent, and the exact percentage for your business will depend on the degree of risk that your business represents. Cash advance companies generally put together estimates that involve receiving full repayment of the collected amount within about nine months. The lender has no collateral in the form of assets, which elevates the degree of risk. The only collateral is revenue to come in the future, which is variable and (in many cases) far from reliable. This high level of risk is one reason why the revenue ratio is so high.
So the question that many small business owners ask is whether this cost of getting money up front is worth the cost over time. If you take out a $50,000 merchant cash advance and have to pay anywhere from $60,000 to $70,000 back over the next nine months, is that worth while to you? There are some situations when it makes financial sense – and some other situations in which it does not.
Let’s say that you have put together a solid plan for using the advance to lay the financial groundwork for growth down the road. In cases like that, it can definitely be worth the cost. Yes, you’re paying a lot for the use of the money, but the returns in terms of growth down the road will pay big dividends. Let’s say that you’ve been operating a small furniture studio, primarily out of your garage or a small retail store in a lower income part of town. You make great furniture, and your customers love you, but you have a chance to move to a better site or acquire property with a studio that would allow you to expand your operations and your visibility. That is definitely something that you would want to consider doing.
However, there are other situations in which the merchant cash advance does not make sense. If you do not have a strategic plan for the money but just feel overwhelmed by low cash flow, you might be taking a cash infusion now that will balloon into worse debt later. Let’s go back to that same furniture shop. You don’t have a lot of clients, but you still want to buy that larger property. You make good furniture, but you don’t have a plan to reach your niche – but you buy that property anyway. Now you’re on the hook for payments for that property (if the advance does not cover the purchase price) as well as for daily deductions from the sales that you are making. This will put your business into a death spiral.
So are you looking to buy a competitor’s business? Or pick up inventory at a sweet cost? Or buy that next piece of equipment that will make your business much more efficient? Then go ahead. However, if you’re just trying to pay off creditors, and you don’t have a strategic plan, the hard truth is that you might need to look for an exit strategy.
If you do have a plan, and you think that the merchant cash advance makes sense, get in touch with Amansad Financial today. If somewhere between $50,000 and $100,000 would get your business to the next level, get in touch with one of our experts today!