Merchant Cash Advance: Everything You Need To Know

Sometimes when your business is low on capital, you might not have the luxury of waiting months to apply and be approved for a loan. Because of that, you need quicker funding options. One of those options could be a merchant cash advance. You could have your money in as little as a week with a cash advance. Here is everything you need to know about them.

What Is It?

A cash advance for businesses is a one-time, lump-sum loan. You repay the loan with a percentage of your credit card sales over time. If your business doesn’t currently accept credit cards, this type of cash advance won’t work for you.

How Does It Work?

When you apply, your lender will evaluate your daily credit card sales and approve you for an amount based on that. They want to ensure you don’t receive more money than you can pay back. The maximum amount a lender will fund will vary with each company. However, many merchant cash advance lenders offer as much as $200,000.

Your lender will typically use your business credit score and financial strength to determine a factor rate for your cash advance. Factor rates typically range from 1.1 to 1.5 and are used similarly to how an interest rate is. For example, if you are approved for $100,000, and your factor rate is 1.3, you’ll owe a total of $130,000 to your lender.

How Do You Pay The Money Back?

Cash advances are paid back each day through your credit card sales. Your lender will calculate a holdback rate, typically between 10-20% of your daily sales, and deduct the amount from your account automatically. Because the amount is based on your overall sales, you won’t ever find yourself in a position where all of your daily sales are sent to the lender while leaving you with no extra capital on hand for daily running costs.

How Do You Apply?

Many traditional lenders don’t offer a merchant cash advance option, so you’ll need to research your area to find an alternative lender that offers it. You can also look online at lending marketplaces, where you can fill out one application and get offers from many lenders.

Once you have found the lender you’ll be working with, you’ll want to compile the necessary documents for your loan. You’ll need your business plan or company information, the past year of bank and credit card processing statements, the last two years of business tax returns, and proof of identity.