Although merchant cash advances are a financing option of last resort, they do have their pluses:
In this case, let’s say your merchant cash advance provider deducts 10% of your monthly credit card sales until you’ve repaid the $70,000, and your busy restaurant averages $100,000 in credit card revenue per month. You’d repay $10,000 monthly, with daily payments of $333 in a 30-day month. At this pace, you’d pay off the advance by the seventh month. But if your revenue dropped to $70,000 per month, you wouldn’t repay the merchant cash advance in full until the 10th month, paying $233 daily.
As we explain below, the speed with which you repay your loan is a factor in determining your APR and can help drive it into the triple digits.
The predetermined percentage of sales is an estimate based on your projected monthly revenue. Since your sales can fluctuate, the speed with which the loan is repaid could be longer or shorter than expected, says David Goldin, CEO of Capify, a merchant cash advance provider, and president of the Small Business Finance Association, a trade association that represents merchant cash advance companies. “Eighty percent of the time, it takes longer than the purchaser thought it would take.”
Fixed daily withdrawals
This kind of agreement lists a daily or weekly payment to be withdrawn, based on an estimate of your monthly revenue. For example, a business with $100,000 in monthly revenue would owe $333 per day or $2,331 per week based on a percentage of sales of 10%.
Unlike the repayment structure tied to credit card or debit sales, your payment does not fluctuate with your sales. That means you’ll pay the same amount regardless of whether sales are down or up.
Your annual percentage rate represents the total borrowing cost of your merchant cash advance, including all fees and interest. This figure also depends on how long it takes you to repay the advance in full. Use the MCA calculator below to compare the borrowing cost of your merchant cash advance with that of other small-business loans.
Why borrowers opt for MCAs
They’re quick. You can often get an MCA within a week or so with no heavy documentation . Providers look at a business’s daily credit card receipts to determine if the owner can repay.
Physical collateral isn’t required. MCAs are unsecured , so you don’t need to provide physical collateral. This means you don’t have to supply business assets upfront to back your financing – and risk losing those assets if you can’t afford to repay. However, the MCA provider will likely require a personal guarantee, which is a written agreement that makes you personally responsible for repaying the advance. If this is the case, the MCA provider can recoup https://paydayloanstennessee.com/cities/morristown/ any losses in the event that you can’t pay.
When sales are down, your payment may be too. When the repayment schedule is based on a fixed percentage of your sales, repayments adjust based on how well your business is doing.
Still, MCAs are far from a perfect borrowing option, and you can get some of these advantages with other types of financing products.
Reasons to be wary of MCAs
Your APR could be in the triple digits. The annual percentage rate , or total annual borrowing cost with all fees and interest included, typically ranges from about 40% to 350%, depending on the lender, the size of the advance, any extra fees, how long it takes to repay the advance in full and the strength of the business’s credit card sales. This is far more expensive than traditional bank loans, whose APRs are typically 10% or less; online small-business loans , with APRs from 8% to 99%; and business credit cards , with APRs from 12.9% to 29.9%.