Things to Consider when Applying for a Merchant Cash Advance

Small businesses need extra capital to run the business more efficiently and to generate more revenue. Applying for a bank loan is a tedious and time-consuming procedure which is turning small businesses to cash advances and other business loans that are quick and easy to avail. In emergency situations where funds are required urgently to launch new product line or to expand the business or for debt management, merchant cash advance funding can prove to be the best solution. With numerous lenders in the market that offer merchant cash advances, it is advisable to consider the following factors when applying for the cash advance for a small business.

Factor rate

Factor rate is one of the important things that need to be considered by the small business when applying for the merchant cash advance. It is the markup which the lender will charge on the cash advanced. The factor rate differs with each lender and depends on factors such as the type of business, the number of established years of the business, the stability of sales and the average monthly sales. The amount advanced by the merchant is multiplied by the factor rate to arrive at the total amount repayable. It should be noted that markup is different from interest and the total amount along with interest must be paid by the borrower in due time.

Retrieval rate

The second thing that needs to be considered is the deduction percentage. The deduction percentage of sales is often referred to retrieval rate which is a percentage of daily sales. The agreed portion of the credit/debit card sales of the business will be deducted and forwarded to the lender’s’ account that has advanced cash. The percentage of sales varies between 5 and 25%. The deduction percentage totally depends on the amount of cash advanced, the higher the amount, the greater is the deduction percentage and vice versa.

Payment period

The third important thing that you need consider when applying for merchant cash advance is the payment period. It is nothing by the length of the time in which you have to repay the entire cash advance availed along with interest. However, it cannot be precisely decided as the repayment ultimately depends on the amount of daily credit/debit card sales. The estimated repayment period should be ascertained when applying for a merchant cash advance. The average repayment period is eight months and can sometimes extend up to 24 months.

Payment Frequency

The payment frequency refers to how frequently the borrower will repay the cash advanced by the merchant. The payment rate is based on the terms and conditions of the agreement.  The percentage of sales that is deducted from debit/credit card sales of the business usually on a daily basis until the total cash advance availed is entirely paid back. The payment frequency depends again on the total debit/credit card sales made by the business each day. Sometimes when the sales are dry, the payment need not be made to the lender as the repayment is agreed as a percentage of daily sales.

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