With the world coming back to normal after the Covid-19 pandemic, small businesses are finally starting to pick back up again, especially those businesses that require normal interactions outside of the online world.
Still, in spite of sales expecting to rise, there is still a feeling of struggle in the air for businesses. According to the U.S. Bureau of Labor Statistics, even in non-pandemic times, 20% of U.S. small businesses fail within their first year, with a 70% failure rate by the end of a decade. This time period is presenting extraordinary challenges.
Having access to cash can be a gamechanger for these sorts of businesses. For instance, having stock of items in a store, or being able to hire marketing personnel, can make or break your small business. And you know what can help? A Cash Advance.
In this guide, we will show you everything you need to know about business cash advances with One Park Financial and how to get one.
First things first, what’s a Business Cash Advance?
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. Instead, it is an actual advance against a business’s expected future revenue, providing advantages and drawbacks different from those you’d expect with a traditional loan. Put simply, cash is advanced to your business that gets repaid by withdrawing directly to your bank account.
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 daily bank balance. Learn more about how it works and the minimum qualification requirements!
How do Business Cash Advances Work?
When you take out a cash advance, the financing company gives you an advance of funds in exchange for a percentage of your business’s revenue over time. Payments are typically made daily/weekly (and automatically) as your business generates back the funds from sales. The total amount to be repaid is calculated by a factor rate, a multiplier generally based on a business’s financial status.
This repayment comes from a portion of future sales, regardless of how much you earn in sales. You agree on a percentage you’re comfortable with, for example, you may choose 10%, 15%, 20%, or something else, depending on the estimate of your monthly revenue. This will also vary based upon the estimated term of the offer you receive from the funder.
Then, the funder of your payment arranges for payments to be made automatically from your company’s bank account until you’ve paid back the advance, plus the funding fee. And that’s it!
Is a Business Cash Advance Good for My Business?
As we mention, business cash advances can help your business access funding very fast; and in most cases, a decision is made within less than 2 hours. So, if you are in a hurry, this makes it suitable for business owners who need quick access to cash and can’t afford to wait for a bank or credit union to come to a decision. Additionally, the application process is usually very easy with minimal paperwork required, and there’s no need to provide collateral because of the fact that it isn’t a loan.
This type of capital repayment structure is also beneficial because it allows you to calculate exactly how long it will take to pay the advance back based on the amount borrowed. Another component that makes a business cash advance a great funding option is that because the funder is in essence purchasing a percentage of your future revenues, if your revenue drops, you are within your rights to ask to reconcile the daily or weekly repayments to the new reality of your business.
Some companies use business cash advances to purchase stock and equipment, or for refurbishment and repairs. Others use them to fund unexpected costs or aid their business when there’s an unexpected low in cash. They can have advantages over more traditional business funding methods, such as speed, easier approval, more flexible fees, and payments that respond to your level of sales. If any of these sounds like what you need, a cash advance is a good choice for you.
An Example of a Business Cash Advance
Let’s take a look at an example of how this type of business cash advance works:
Say you run a bakery. You need capital because you are making renovations to your infrastructure before the end of the summer. You fill out a 2-minute application and provide your business’s bank statements. With those bank statements, a funder will underwrite your business based on the cash flow seen on the statements.
Let’s say, for example, that you average $10,000 in monthly gross revenue in your bakery. The amount funded tends to be between 80-120% of your average monthly revenue. So let’s assume you receive $10,000 in funding (100% of your average monthly gross revenue).
The term of the advance is then calculated to be 4 months with a payback of 7.5% per month. That means in total (from the daily or weekly debits), you will pay back $750 in fees for the $10,000 received, which makes the total repayment amount $13,000. If your revenue stays at $10,000 per month, you’ll pay back $3,250 ($2,500 of the advance + $750 in fees) every month.
Ready to Get Funded with a Business Cash Advance?
If you are looking for a business cash advance to invest in your business, we can help! One Park Financial offers you a network of funding sources, and we specialize in small businesses just like yours!
Check out our form to get pre-qualified in just a few minutes – one of our experts will guide you through the whole process.