Unexpected large expenses are something that can break a small business. Even if the business is doing well, it can be hard to get together enough money to pay for a big ticket item. One way that small businesses can get cash quickly is through a merchant cash advance. With this type of financing, a lump-sum payment is given to the business in exchange for a percentage of future debit card or credit card sales. This percentage is referred to as the retrieval rate and ranges from 5% to 25%. Merchant cash advances can also be paid back as automated clearing house withdrawals, where money is debited daily or weekly from a business's bank account. While merchant cash advances can work for some small businesses, they may not be the right choice for others. Here are three things to consider.
Factor Rate
Unlike traditional business loans, the repayment for a merchant cash advance does not involve an annual percentage rage. Instead a factor rate is assigned to the loan. This rate is a decimal value and represents the amount the business is agreeing to repay. The average factor rate is between 1.14 and 1.44. In order for a business to determine how much they are agreeing to pay their provider, they need to take the total amount of the loan and then multiply it by the factor rate. The riskier the advance is, the higher the factor rate. Businesses with high factor rates may want to consider other means of funding before agreeing to a merchant cash advance.
Fluctuating Sales
Since the repayment of merchant cash advances is often dependent on credit card or debit card sales, any fluctuation in future sales can affect how long it takes to pay back the advance. The average payback period is between 4 and 18 months. Small businesses who have seasonal fluctuations in how much business they do or who are expecting a slow down in business for other reasons may want to think twice before taking out a merchant cash advance.
Other Methods Of Borrowing
The main benefit of a merchant cash advance is that it is easy and quick for most small businesses to obtain. However, for those who have enough time to look around, there are other methods of borrowing that may work better. Small business loans may end up being a better choice for some small businesses. Small business credit cards can also be a great alternative. These methods have set interest rates and can end up costing less than a merchant cash advance in the long run.
Getting a large sum of money quickly can be a hassle for many small businesses. Merchant cash advances can be a solution. However, small businesses should carefully consider the factor rate, the possibility of fluctuating sales, and other methods of borrowing before agreeing to this type of funding. Contact a company like Fordham Capital for more information.
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