Editor's choice: Fora Financial business loans
- Online application process
- Fast funding
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Without time-consuming credit checks and rigid repayment plans, merchant cash advance is perfectly suited to the fast-paced, unpredictable world of retail. Similar to a business loan, but with several important differences, a merchant cash advance may suit any company that receives the majority of its payments by card.
A merchant cash advance is a type of business financing for companies that have a large amount of credit card sales. Your business gets quick access to revenue from sales and then repays it plus a fixed charged based on a percentage of your sales. Merchant cash advances can be set up as daily or weekly financing.
Merchant cash advances are designed to provide a temporary cashflow solution to business owners who might not be able to qualify for other types of financing. It's typically fast, but it can one of the more expensive business financing options out there.
Thinking of getting a merchant cash advance? Let's take a look at how these three lenders work.
$5,000 to $500,000
Factor rate of typically 1.1 to 1.3
0.33 years to 1.25 years
6+ months in business, $12,000+ monthly revenue, no open bankruptcies
$5,000 to $500,000
Up to 25%Up APR
to 1.17 years
Business must be 12+ months old, have monthly revenue of $10,000+ and not be located in Alaska or Hawaii. Minimum borrower credit score of 520+.
$5,000 to $1,000,000
Up to 5 years
Steady flow of credit card sales, bad credit OK
Fora Financial is a direct lender that provides short-term business loans and merchant cash advances. Your business can apply with a quick online application. While more expensive than other types of business financing, Fora Financial's typical factor rates are relatively low. However, it's turnaround time of up to 72 hours is slightly longer than what you might find elsewhere.
Lendr is another direct lender that specializes in merchant cash advances. The total loan cost, comes out to around , including the factor fee. You don’t need to have good credit to qualify — or even fair credit for that matter. But your business must be around for at least one year. In addition to merchant cash advances, Lendr also offers working capital loans, equipment loans and more.
RapidAdvance is another online direct lender that specializes in short-term business financing, including merchant cash advances. Businesses can typically qualify for between 85% and 250% of their monthly credit card sales and all credit types are accepted. However, RapidAdvance isn’t forthcoming about its rates as some other lenders, so you need to request a quote before you can compare it with other lenders.
A merchant cash advance works a lot like a short-term business loan. You apply for a one-time sum, typically based on your monthly credit card sales. Your business then pays this back plus a fee that your lender determines by something called a factor rate or factor fee.
Instead of making fixed installment payments, your business then pays off the loan with a percentage of each credit card transaction, sometimes called the holdback. Holdbacks typically range from 10% to 20% of each sale. So how long it takes to pay back your loan is determined by your holdback rate and your sales — not a set loan term.
Some companies also have a minimum monthly payment that your business must make even if it doesn’t have any sales. Many have a maximum amount of time your business can take to repay a merchant cash advance, typically around one year.
A factor rate is a number above 1 that your lender uses to come up with your total loan cost. It does this by multiplying your factor rate by your loan amount. They typically range from 1.1 to 1.5, though some lender charge factor rates of 3 or even higher.
Let’s take a look at an example. Say your business qualifies for a $10,000 merchant cash advance from a lender at a factor rate of 1.15. Here’s how it breaks down:
Merchant cash advances are ideal for retailers and e-commerce businesses. But any business with a high volume of credit card sales might be able to qualify.
This can even mean young businesses and owners with poor credit. Some merchant cash advance companies are even willing to work with businesses that have been around for as little as three months. However, you can't use a merchant cash advance to fund your startup — qualification typically depends on your business's credit card sales record.
Merchant cash advances are often referred to as business payday loans — and for good reason. With no federal regulation, your lender has a lot more leeway when it comes to how much it can charge you and how it discloses its fees. Watch out for complicated contracts that are difficult to follow — your lender might be trying to hide something. If possible, take some time to review your contract and ask an expert if there's anything that isn't clear.
The lack of federal regulation also means that lenders need to meet state requirements to legally offer financing. Double-check to make sure your lender is able to lend in your area before applying for a loan.
The application is often simple, meaning that it often has a faster turnaround time than other types of business financing. Lenders typically only have a monthly or annual sales requirement and accept all credit types. Some might not even run a credit check for smaller advances.
Often, you can apply online by filling out a quick application. Once your application has been approved, some lenders might ask you to open a separate bank account known as a "pass through" account. You can then use this for processing any transactions and the lender can collect their share. Others might simply ask for access to your business's bank or Paypal account to withdraw the repayments.
Sometimes merchant cash advance repayments can slow your business down, especially if you don’t have the sales you expected. In that case, you might want to look into refinancing. There are two main ways to refinance a merchant cash advance: Refinance with a traditional business loan or refinancing with another merchant cash advance.
Both can be expensive options: With a term loan, your business pays interest and fees on top of the fees already rolled into your merchant cash advance. With another merchant cash can often means doubling up on the factor rate. However, term loans typically come with monthly repayments which are often easier to manage. It can also your business on a solid path to pay off the debt.
Don't think a merchant cash advance is right for your business? Consider these alternatives instead.
Merchant cash advances might be an easy way to get cash when your business is facing a seasonal dip in sales. It's also one of the few options that doesn't require a credit check. But the high cost and lack of regulation might make you want to consider other options first. You can get started by checking out our business loans guide.
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