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Business cash advances, which are also known as merchant advances, are a great alternative to the various traditional business loans out there. For entrepreneurs, this option can be beneficial for paying off debt, buying equipment, investing, renovating, making a capital advance, or even buying out a partner. This is ideal for those who might need a quick option for capital funds.
Instead of acting like a traditional loan, business cash advances are a lump sum payment that comes directly from a cash advance provider for a certain share of future sales from your business. It might seem simple at first, but this option has a few things all business owners should be aware of before jumping in.
Even though obtaining this advance doesn’t require much documentation, you will still need to give the lenders a few things with your information.
When filling out the initial application, the business should provide the information above to the cash advance lender. It isn’t an instant application either, and businesses might have to wait at least one to two days for a decision on their application. Once the lender has accepted the application, it will take anywhere from 7 to 10 business days for the business to receive their cash advance from the lender.
Cash advances typically have high-interest rates and shorter pay periods than a typical business loan. However, they do have several benefits for the businesses that decided to go with this option.
A cash advance is determined by three factors: the advance amount, the factor rate, and the daily retrieval rate. The advance amount is figured as the amount of money that the company is receiving based on the credit card income from the past six months of your business. These amounts are usually determined between 80-percent to 125-percent of the monthly sales. The factor rate is the fee that is charged by the lender. Since these are usually high-risk options, this rate could range between 20-percent to 75-percent. Finally, the daily retrieval rate is essentially how much money is taken from the daily credit card sales, ranging from 15-percent to 25-percent.
When you consider the criteria mentioned above, an example cash advance could look a little something like this sample below.
This is a good model to use for those businesses considering this option.
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