A merchant cash advance has become an integral part of many small to mid-sized businesses, even those in Canada. In the United States and United Kingdom this advance is referred to in different ways. In Canada, however, it is referred to as an advance on credit. It can be a useful tool for a business owner who needs additional funds between paydays. What is merchant cash advance? Here are some things to know about the nature of merchant cash advances and when they might be helpful.
A merchant cash advance, also known as a merchant cash line, was originally designed as a small lump sum payment to an individual in return for an agreed upon percentage of upcoming credit and debit card sales. The agreement typically stipulated that the business owner could borrow up to a certain amount of money over a certain period of time with the stipulation that interest would accrue on the amount that was not repaid. The interest rate would depend on the credit rating of the borrower. Interest rates have since become more standard in most types of commercial finance in order to assist small businesses meet their funding needs. Most commercial lenders require personal guarantees or a written guarantee from the business owner before offering them a personal guarantee or business loan.
Types of Merchant Cash Advances Small businesses have many options available when it comes to getting a merchant cash advance compared to the small-business loan that is often required for a large purchase such as a building or vehicle. Personal guarantees are common, as is a simple application process that only requires a few forms to complete. Many lenders are now offering “floor” loans where a percentage (usually 20%) of the purchase price goes to the lender, and then the remaining balance goes to the borrower. This type of financing is not offered to all types of small businesses but it is the most common option available for those seeking additional funding.
Interest Rates There are two main factors that will determine the interest rate you are charged when you take out a merchant cash advance. These factors are your credit score and the amount of money you are asking for. Banks and credit card companies base much of their interest rate on your credit score and the amount of credit you have available to you. If you have less than perfect credit, it will make it more difficult for you to get a good rate because you are seen as a higher risk investment. If you have good credit, you will be able to get better rates on your small business loans.
Annual Percentage Rate Or APR This is a prime interest rate for cash advances because it is usually the most significant factor in determining how much you will pay back over the life of the loan. APR is determined based on your credit history and the amount of credit available to you at the time of application. Lenders look at this number and adjust the interest rate according to the amount of risk involved in lending you the money. If your business has a high annual percentage rate, it increases your total amount of interest paid over the life of the loan. The best way to get a low interest rate with these types of loans is to build your credit reputation and your customer base.
Credit Card Factoring When you use a credit card to finance your small business expenses, you are going to have to pay a fee to the credit card company if you use their credit cards to make your purchases. You can avoid this fee by using your own credit card to pay for your business purchases. Credit card Factoring is a way for lenders to provide you with a lump sum amount in order to pay back your small business expenses. In fact, this is the most effective way for them to obtain their money. You multiply the cost of the factoring transaction by the total amount you are paying monthly to the credit card company. This allows you to get your cash advance paid off faster and without having to pay interest.