How to refinance a merchant cash advance |
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Merchant cash advance refinancing

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It can help make repayments more manageable, but you won’t save in the long run.

When your business needs cash fast, a merchant cash advance might be your only option. But often those daily repayments can be hard to keep up with. If your business is struggling to stay afloat, you may want to consider refinancing. Though beware: It can sometimes make an already expensive loan even more costly.

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    How to refinance a merchant cash advance

    There are two main ways to refinance a merchant cash advance:

    1. Take out a business loan to pay off your balance.
    2. Take out another merchant cash advance to pay off your current debt.

    Both offer a chance to make your repayments more manageable, but they won’t help you save.

    That’s because merchant cash advances don’t work like traditional business loans. Instead of paying back the loan plus interest that adds up over time, they come with a fixed fee. Lenders come up with your total loan cost by using a factor rate — a number typically between 1.14 and 1.3 — that it multiplies by the amount you borrow. Factor rates sometimes go even higher.

    So, if you took out a $10,000 merchant cash advance at a factor rate of 1.2, you’d pay back $12,000 no matter how long it takes. Your loan cost doesn’t change if you refinance.

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    Rates last updated December 16th, 2018
    Unfortunately, none of the business loan providers currently offer loans for these criteria.
    Name Product Product Description Min Loan Amount Max. Loan Amount Requirements
    LoanBuilder, A PayPal Service Business Loans
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    Annual business revenue of at least $42,000, at least 9 months in business, personal credit score of 550+.
    LendingTree Business Loans
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    Varies by lender and type of financing
    Varies by lender and type of financing
    Varies by lender, but you many require good personal credit, a minimum business age and minimum annual revenue.
    Credibly Business Loans
    Funding to cover business expenses with daily or weekly repayments.
    500+ personal credit score, 6+ months in business, $15,000+ average monthly deposits
    Lendio Business Loan Marketplace
    Submit one simple application to potentially get offers from a network of over 75 legit business lenders.
    Must operate a business in the US or Canada, have a business bank account and have a personal credit score of 560+.
    National Funding Small Business Loans
    Working capital loans and equipment financing, some high-risk industries may be eligible.
    Be in business at least one year and make at least $100,000 in annual sales. Other loan types have additional requirements.
    LendingClub Business Loans
    With loan terms that vary from 1 to 5 years, enjoy fixed monthly payments and no prepayment penalties through this award-winning lender.
    12+ months in business, $50,000+ in annual sales, no bankruptcies or tax liens, at least 20% ownership of the business, fair personal credit score or better
    OnDeck Small Business Loans
    A leading online business lender offering flexible financing at competitive fixed rates.
    500+ personal credit score, 1+ years in business, $100,000+ annual revenue
    Fora Financial Business Loans
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    Method 1: Traditional business term loan

    A term loan is one of the most common ways to refinance any type of debt, including merchant cash advances. Here, your business applies for a term loan that you use to pay off the balance of your merchant cash advances. Your business is then responsible for paying off this new loan.

    Term loans can help make your daily or weekly repayments more manageable by spreading them out over a longer period of time. Most merchant cash advances have terms of three months to a year, whereas term loans often start at around three years. However, the longer your business takes to pay off the loan, the more you’ll pay in interest. And this is on top of the relatively high fee you paid on your merchant cash advance.

    Business loan providers also usually have credit, revenue and time-in-business requirements. If your business is less than a year old, makes less than $100,000 a year or you have poor credit, you might not be able to qualify for the most competitive rates — making it even more expensive. But if you’re really struggling with your merchant cash advance repayments, then even a short-term business loan could potentially help.

    Method 2: Another merchant cash advance

    Another common way to refinance a merchant cash advance is to take out another one to pay off the current one. You can do this through your current lender or with another merchant cash advance company. Often, you can also apply to borrow more funds in addition to refinancing the debt you currently have. This method might be useful if your business needs even more funds or wants to extend its term and can’t qualify for any other type of financing.

    You might want to treat it as a last resort, though, since you’re essentially doubling up on the factor rate. Let’s take a look at an example:

    Say your business got an advance of $10,000 at a factor rate of 1.2, meaning you’d owe a total of $12,000. If you decide to refinance that loan after paying off $6,000 at the same factor rate, you’d have to pay $7,200. In other words, the total cost of that merchant cash advance would go up from $2,000 to $3,200.

    4 reasons to refinance a merchant cash advance

    Refinancing a merchant cash advance might be expensive. But there are several ways your business can benefit.

    1. Lower your monthly repayments. Refinancing your merchant cash advance for a loan with a longer term can help reduce how much your business owes each month.
    2. Improve your business’s credit score. Merchant cash advance companies don’t report repayments to business credit bureaus because they technically aren’t considered loans. Term loan providers do, however.
    3. Make less frequent repayments. Merchant cash advances come with daily repayments, which can make it difficult for your business to grow. Term loans typically come with more flexible monthly repayments.
    4. Make fixed repayments. Unlike merchant cash advances that take a percentage of your daily sales or deposits, term loans usually come with fixed repayments that are easier to predict.

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    3 reasons to avoid refinancing

    While refinancing can make repayments more manageable, there are a few drawbacks to consider.

    • It’s even more expensive. Since the fee is built into a merchant cash advance, refinancing can’t help you save on the overall cost. And taking out another loan or merchant cash advance means you’ll be paying even more.
    • You might not qualify. Most of the benefits of refinancing only apply if you use a term loan, which your business might not be able to qualify for if it’s not in good financial shape.
    • It could lead to a cycle of debt. Refinancing with another merchant cash advance might start a cycle of debt, where your business has to repeatedly refinance or “roll over” the advance to keep up with repayments. You could end up owing several times more than you originally borrowed.

    Bottom line

    Merchant cash advances are expensive, and unlike other types of debt, refinancing typically only increases the cost in the long run. However, using a term loan to refinance could be a good option if daily repayments are weighing you down.

    To learn more about your options, check out our guide to business loans.

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    Anna Serio

    Anna Serio is a staff writer untangling everything you need to know about personal loans, including student, car and business loans. She spent five years living in Beirut, where she was a news editor for The Daily Star and hung out with a lot of cats. She loves to eat, travel and save money.

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