As a business owner, it is a very good idea that you understand prevailing business loan rates, keeping in mind that it is important that you remain up-to-date on this information if you are considering acquiring a loan anytime soon.
Although a merchant cash advance is not considered a loan in the normal sense, the funding has interest charges on top of the advance the provider gives you.
Merchant Cash Advance Costs
Merchant cash advances, like other types funding carry loan rates. In fact, the MCAs also carry a considerable annual percentage rate. This is the total cost of the advance, including all the associated fees-which, are usually in the triple digits.
Generally, you will find that MCAs are priced utilizing what is regarded as a factor rate or buy rate. What this means is that although you find a MCA having an estimated annual percentage rate, that business loan rate is not the actual or real cost of the capital extended to you. The factor rate is what establishes the actual cost of merchant cash advance funding.
Simply put, the factor rate is the total sum you will be required to repay the MCA provider throughout the lifespan of the advance given. This factor establishes the fundamental difference between MCAs and other form business loan rates, especially those obtained from banks.
How to Calculate the Business Loan Rate of a Merchant Cash Advance
Normally, the loan rates of MCAs are determined based on a buy rate averaging between 1.2 to 1.4. When you want to determine the cost of the advance or the amount that you will be repaying the MCA provider, you multiply the buy rate with the total amount that you borrowed.
Assuming that you have borrowed $10 000 and the factor rate is pegged at 1.20, you will need to repay the advance you received, plus another $2000. Considering these figures, you might make the assumption that the business loan rate is at 20%.
This however not the case since the advance repayments that you make is deducted directly from your credit sales weekly or daily. Since your sales will fluctuate from time to time, then the actual terms of MCAs are variable. Experts estimate that the fluctuations cause the computed annual percentage rate or the business loan rates for MCAs to typically range between 80%-120%.
You need to keep in mind that the actual cost of your MCA is subject to the factor rate. The most significant costs associated with the advance that you borrow are the holdback percentage and the factor rate. The factor rate refers to the total amount of the borrowed advance you will repay the MCA provider. The holdback percentage, on the other hand, is the proportion of the daily or weekly credit card sales that your MCA provider keeps collecting until you repaid the factor rate fully.
The business loan rates of MCAs are higher due to the associated costs and risks involved. The costs, including the daily remittances schedule, should be observed closely. Otherwise, you might find your business trapped in debts. Make sure that you are not caught up in such a trap or you will end borrowing more MCAs to refinance the previous one or even be forced to file for bankruptcy.