What is a Business Cash Advance and How Does It Work?

10
September 2019

Just as you might expect from the name, a business cash advance (also known as a merchant cash advance or MCA) isn’t a loan. It is an actual advance against a business’s expected future income, providing advantages and drawbacks different than those you’d expect with a traditional loan.

How does a business cash advance work?

A business cash advance is an easy way for smaller businesses – especially those whose owners don’t have a perfect credit history - to get a lump sum of cash quickly. The advance is then paid back by an automated withdrawal of a set percentage of your (typically daily or weekly, but terms can vary) business transactions.

Are business cash advances the same thing as merchant cash advances?

Yes, the terms are interchangeable. The thing is, small business owners would hear “merchant cash advance” and assume that this sort of funding was only available for people who owned retail businesses. And while business cash advances are a great option for businesses such as shops and restaurants that get most of their income from daily credit card and debit card transactions. But other small businesses can also qualify for a business cash advance.

Do you need a great credit score to qualify?

A business owner doesn’t have to have a great – or even a good! - credit history to be approved for a business cash advance. That makes this type of funding an especially attractive option for an owner of a small successful business who doesn’t meet the strict requirements necessary get approved for a traditional bank loan.

How do I pay back a business cash advance?

Typically, you repay by agreeing to have a set percentage of your actual revenues automatically withdrawn from your business bank account. For example, if you repay daily (which is typical), your set percentage is 10%, and the day’s revenues total $1000, then the repayment amount for that day is $100. On another day, when revenues are $100, the repayment amount would be $10. Repayments are automatically withdrawn according to the terms of the business cash advance agreement until the advance and any associated fees and interest is paid back.

Do I have to accept credit cards to get a business cash advance?

Many business cash advances can be paid back by remitting the agreed upon percentage directly from a business bank account through ACH (Automated Clearing House) withdrawals. So you don’t need to be a “merchant” to get a merchant cash advance/ business cash advance.

What is a factor rate?

Instead of the annual percentage rates that credit cards and bank loans use, MCAs use “factor rates” – usually between 1.1 to 1.5 - to represent the total amount that will be repaid to the advance provider. You can figure out how much it will cost to repay a business cash advance simply by multiplying the advance amount by the factor rate. As an example, an advance of $25,000 with a 1.3 factor rate would have a total repayment amount of $32,000. There may be additional fees, such as a processing or set-up fee, so check the terms of your MCA carefully (just as you would for any business agreement).

What is the retrieval rate?

That’s the percentage of your sales (or income) that will be withdrawn daily (or weekly) to pay back the advance. Average retrieval rates are between 5-15%.

How quickly can I get funds from a business cash advance?

The funds are typically deposited into the business owners account within 72 hours of you accepting a business cash advance offer. Compare that to money from a traditional bank loan, which is often not available for a month or more, according to a [study](http://www.hbs.edu/faculty/Publication Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf) by Harvard Business School.

How long do I have to repay?

The average repayment time frame for a business cash advance is 8- 9 months but can range from 3 months to 18 months.

What are the drawbacks of business cash advances?

A business cash advance does not build your credit rating, as it is not a loan and therefore is not reported to credit bureaus.

Some people think that it will be a problem to have repayments automatically withdrawn from your business account. It is important to be realistic about what you can afford to pay back, and how much of an advance you should accept. That said, since repayments are tied to your daily revenues, it is often easier to repay a business cash advance, especially if your business has seasonal highs and lows.

As with any business deal, it’s important to understand the contract before you sign it. Make sure you understand what the percentage of revenue equals in real money, what the factor rate is and the total amount you actually owe.

For help in understanding your options, you can turn to One Park Financial’s funding experts. One Park Financial works with a network of funding sources, and acts as an advocate for small business owners, helping to guide you through the funding process and explain your options. Visit oneparkfinancial.com and get pre-qualified (absolutely no obligation!) or call 1-888-327-7846 for more information now.