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Things to Consider Before Getting a Cash Advance

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.

An Overview of the Process

Even though obtaining this advance doesn’t require much documentation, you will still need to give the lenders a few things with your information.

  • The first documentation you need is the length of time the business has been in operation. You must show that the business has been operating for at least a minimum of one year. Some lenders might require more time.
  • Another required document is the credit card transaction. These will need to be detailed to help lenders see your re-payment records from past credit card purchases.
  • Lenders will also need a credit history report, even though they aren’t as selective as banks. Some lenders might even ask for both a business and personal credit report.
  • Also, past bankruptcies and liens can disqualify a person or business from a cash advance. Still, others might be disqualified if a property lease or another cash advance lending agreement has more than a year remaining to pay back.

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.

The Reasons to Use an Advance

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.

  • The first and most obvious benefit is that cash advances are much easier to get approved than traditional loans. In fact, most businesses only have to wait a maximum of two days for a decision based on their given information.
  • Another benefit of cash advances is the quickness of the cash. After a decision has been made, businesses can expect their cash as quickly as 72 hours later. A cash advance, unlike a loan, is considered a sale of future income and a purchase. Because of this, it doesn’t show up on the credit report of the business.
  • One great benefit is the zero fixed payments without a due date. You pay what you can according to your cash flow in the business. This is especially beneficial because it allows you to pay what you can in slow months or pay it back faster if your business grows in income.
  • A final benefit is the one who takes the fall. Should your business fail or you go out of business, the cash advance lender is the one who takes the fall and not the business. This makes this a less risky option for businesses who need money fast.

Sample Costs

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.

  • With a cash advance of $50,000
  • A factor rate of 35-percent
  • A daily retrieval rate of 25-percent
  • The factor rate a total of $17,00
  • A total amount owed to the lender as $67,500
  • A daily credit card income as $5,000
  • A daily retrieval rate as $1,250
  • The time needed to repay at 54 day’s maximum

This is a good model to use for those businesses considering this option.

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