If you run a small business and find yourself needing a quick loan to get your cash flow up during a slow season or bring in some working capital right now, there are loans called merchant cash advances (or business cash advances) that have helped many entrepreneurs. How did this work? This is a loan that you pay back with a percentage of your daily credit card receipts. If you’ve been considering this type of financing, though, you may have come across a term that you haven’t seen before – the “buy rate” or the “factor rate.”
This “factor rate” isn’t written in a percentage but instead like a decimal. You’ll normally find a factor rate on this sort of advance between 1.1 and 1.5, and this number varies with your industry, the age of your business, the relative reliability of your sales and the amount of money you bring in with credit cards each month.
So how do your factor rates work? Well, multiply that rate by the amount that you plan to borrow. Let’s say you’re taking out a $30,000 advance with a factor rate of 1.2 for a 12-month term. That means that you will repay $36,000 for that $30,000. Now you might be thinking that this sounds like a 20% interest rate on that loan. However, the interest cost of the note is 20%. However, when you take out this sort of advance with a factor rate, the interest goes to principal right when you originate the note. This is why you don’t see APR figures listed with the loan. APR is what you see when the interest accrues on the principal, and it gets smaller as you make more payments. This does mean that you don’t reduce the cost of the interest by making larger principal payments. If you take a $30,000 advance, you owe $36,000, even if you pay it all back next week.
Even with that in mind, the flexibility that comes with a merchant cash advance means that the payments are set to where you aren’t going to have to pay back more on a daily basis than you take in. The payments come out of your credit card receipts and reflect a set percentage. So you will pay more on a big day, but when you have slow days, you won’t find the till down to zero because of your payment.
It is true that the merchant cash advance is a pricey loan. But sometimes if you find yourself behind the eight-ball and need some cash quickly, they can be a business lifesaving choice.
Lenders use a variety of factors when determining your factor rate. They include:
- Business bank statements (usually at least the last three months) to show your business’ financial stability
- Credit card processing statement (the last three months) to show that you take in a solid amount of money each month through card payments.
- Business tax return (only the most recent year, in most cases)
- Years in business (usually you have to have been open at least a year to qualify for this type of financing)
If you are interested in finding the right merchant cash advance for your business, get in touch with Amansad Financial. This could be the right tool to keep your business up and running through this lean time until your sales get back up high again.