One of the most common questions that we get from potential merchant cash advance clients is how much money they can get from an advance. Right after that, the next question is usually how much the money will cost, or what the interest rate will be.
How Merchant Cash Advance Rates Work
This is a smart question to ask – after all, money that comes quickly (within a few business days) and without any concrete strings (no collateral or assets) brings a good deal of risk for the lender. Also, if a business owner has pristine credit and a standing history of successful operations, then he’ll be able to get financing at a lower rate from a bank.
Of course, that leaves a lot of people out in the cold when it comes to financing. If you worked for twenty years as a firefighter, retired, and then decided to put your savings into opening a restuarant, and you’ve been open for about a year, even if your bar has done well, you could have a tough time getting a bank to finance a major expansion for you. Your business will only have been open for a year, and even though firefighters are important members of the community, it is unlikely that you got wealthy in that career field. And if you got a divorce five years ago and fell behind on a number of your bills, leaving your credit in a bit of a mess, then you’re even more behind the 8-ball.
That’s why merchant cash advances became popular – they are a way for lenders to invest in small businesses where the owners can’t get the answers they want from the banks. But with that increased risk of a merchant cash advance comes an increased expense.
Merchant Cash Advance Factor Rate
Merchant cash advances come with what is called a “factor rate.” Generally, this will be between 1.2 and 1.4. The lower the risk profile, the closer to 1.2 a factor rate will be. The higher the risk, the more likely it is to spiral up toward 1.4.
What does a Merchant Cash Advance factor rate mean? Well, you multiply your advance amount by that number to see what you’ll be paying back over time. So if you take out a $75,000 merchant cash advance and you have a risk profile that is on the low end, you could get that 1.2 factor rate. So $75,000 X 1.2 = $90,000. That means that you’ll get $75,000 within a few business days, and over the repayment term, you’ll be paying back a total of $90,000.
Is that a lot of profit for the lender? Well, yes. If you pay it back over six months, that is the same as a 40% simple interest rate. But there are a couple of reasons why this still makes sense for many small business owners.
- You don’t have fixed payments. Each business day, a set percentage of your credit and debit card sales go to the lender. Ten percent is a fairly common number for this. So if your bar brings in $8,000 on a Thursday night, you get $7,200 and the lender gets $800. If you have a really slow Monday night and bring in $900, you get $810, and the lender gets $90. So the payments shift with your business level, which means that your cash flow is not at risk at the same level it would be if you faced a set monthly payment.
- There’s no collateral. You don’t have to put any of your own personal or business assets on the line with this sort of loan. So if business slows to a crawl, so do your repayments to the lender – and it doesn’t hurt your business or personal credit.
- You get the money quickly. After a few business days, or sometimes a week, you have your advance in hand. You don’t have to wait several weeks for the banks to pore through all of your paperwork and then finally hand over a check. Generally the only paperwork required is credit card income receipts and bank statements.
Are you interested in learning about how a merchant cash advance could help your business? Get in touch with us at Amansad Financial to learn more about how we can work with your company.