5 Things to Know About Merchant Cash Advances
Deciding to get a merchant cash advance, also known as a business cash advance, is something that should be carefully researched before paperwork is signed. As with other loans, there are benefits and drawbacks to be considered.
1. APR
The annual percentage rate varies but is generally higher than other types of loans. It can reach three digits in some cases, depending on the borrow, lender, fees, length of the repayment plan and size of the advance.
2. Payment Methods
The most common type of merchant cash advance is the offer of cash that is repaid through fixed debit withdrawals directly from the borrower’s bank account. These are known as automated clearing house withdrawals. Payments can be deducted daily or weekly until the amount loaned and all fees have been paid off.
Another payment method is through the calculation of credit or debit card sales. The repayment time using this method can vary, as months with low credit and debit card sales will result in a lower payment.
3. Approval Process
The approval process for a merchant cash advance is usually quick. Applicants will normally receive the loan within a week. The paperwork is not extensive but should be read carefully to ensure the terms are as favorable as possible. Providers will check into the company’s credit transactions to determine a payment amount. A background credit check may be run, which could damage the company or owner’s credit score.
4. No Collateral
Merchant cash advances are usually unsecured so that there is no danger of losing any assets should the company go out of business and repayment become impossible. Read the contract carefully before signing, as some providers may ask for a written agreement that the person or people requesting the money be personally responsible for payment should something happen.
5. Early Repayment
Unlike other types of loans, there is no advantage to paying off a merchant cash advance ahead of schedule. The fees are fixed, so whether the money is repaid on time or early, there are no savings on interest. Depending on the contract, there also may be an early repayment penalty involved.
Having enough money to cover expenses is vital for every company. Working capital can be acquired in a number of ways and should be used properly once obtained. It is important to make sure that the terms of any loan are understood and acceptable before signing any paperwork. A bad loan can ruin a company, while a good loan gotten at the right time can help a business flourish.
