A merchant advance express or merchant cash advance refers to lump sum payment that is provided to a business in barter to a fixed percentage on daily credit card payments. They are short-term financing options for small businesses with terms of 2 years or less. They are not characterized as conventional loans, instead, represent future business credit sales. Because merchant cash advances usually have a high cost of capital, they are often used as a last resort for businesses while they are considering financing options. However, due to the flexible repayment schedule, merchant payments offer a lucrative alternative to small businesses as they have the low capital to work with.
What exactly is Merchant advance express
In easier words, a merchant cash payment is an advance payment, which is given to you in return for daily credit card receipts of your business. You will be charged with a cost of capital that usually is between 1.1x – 1.4x of the amount that is loaned. Therefore, the cost of acquiring such financing is expensive to other means of borrowing. Businesses opt for this option when they need to cater for their short-term financing needs, generate some working capital or just to engender some cash flow for the business.
Merchant advance express loans offer quick funding option as you can receive the credit in 2 – 5 days, given you clear the eligibility criteria. However, the eligibility criteria may be a cause of concern for small businesses as they must abide by following qualifications.
- At least one-year accepting credit card payments
- Sale of $50000 on your credit card
- More than 500 FICO score
- Merchant cash advance provider who is affiliated with credit card processor
Merchants have to ensure that the client they are dealing with have credible financial history and has shown responsible economic behavior in the past. They have to minimize their own risk before approving the merchant advance express. Typically, the most significant measure of a business ability to pay back on future payments is looking at their daily receivables. Merchants rely on a target dollar amount, which a business has to show before it’s approved for the loan. The target amounts vary from business to business and also depends on the amount a business wants to borrow. Because these merchants are offering a quick solution to a business need of keeping appositive cash flow, they expect repayment in the allotted time.
Merchant advance express is typically considered a costly option for a loan and is only used by experienced businesses. Also, some businesses cannot find another mean for acquiring the loan, therefore, have to contend with what’s at hand. Even someone that does not have a high credit score can get the loan if their credit payments are positive. When the loan is approved, a business will be charged with a factor rate and merchant will get a percentage of your daily credit card receipts, which is referred to as “holdback percentage.”
Is merchant advance express a right choice for your small business?
Acquiring loan from a merchant is considered to be a costly choice, however, still, many businesses prefer it. Following type of businesses usually, opt for such an option.
- Those who cannot acquire other means of financing
- Someone who needs an immediate loan and avoid conventional choices because they take considerable time
- Those businesses who are not able to meet the qualifications of a standard loan
- As a strategy by seasoned firms to outrival the competition
Though a merchant loan can be quite handy for a small business for multiple reasons, however, merchant advance express is not heavily regulated by the federal government. It means that it might be vulnerable to fraud. Therefore, you should always choose a reputable merchant, who has a good history of dealing with different clients. With only a few drawbacks and multiple advantages, merchant loans are great for catering to your short-term financing needs and working capital requirements. It, however, requires greater care at repayments because if you miss even a few, the cash cycle pressure can put your business at risk.
How does it work?
A business has to initially apply merchant advance express, which provides crucial details about your business to the merchant. The merchant than asses the credit score of business owners and then the credit payments of a business. To qualify the business must meet criteria mentioned above. Once the loan is approved, a lump sum amount is granted to the business within 2-5 working days.
Repayment terms for the loan depend on what’s referred to as “factor rate.” It is a multiple, which a business is required to pay throughout the life of an advance. Factor rate is typically calculated as followed.
1.2 – 1.4 average factor rate
The 1.2- 1.4 average factor rate implies that for every dollar in advance, a business will have to pay back 1.2 – 1.4 dollar back. So if the advance is equal to $10000 and the factor rate is 1.3, a business will have to pay $13000 back. This amount is paid back to the merchant advance express daily by “average holdback percentage.” The average holding percentage varies between 8% – 30% for different businesses and is deducted directly from your account. So if the holdback percentage for business is set at 10% and they have a total of $1000 as credit card payments daily, the holdback amount would equal to $100.
This amount is automatically transferred to your merchant from your bank account so as long as there is enough cash in your bank account, you do not have to worry about the repayment. The automated payment, however, is only available with credit card partner merchants. Another critical point to note here is that credit card payments for business would not be the same every day, therefore, if the receipts for the day are $500 instead of $1000, the holdback percentage would also decline to $50. Because of this reason, there is never a defined time for a business to pay off all the merchant advance express unless the factor rate is paid in full. None the less, typically the payback period varies from 12 – 24 months.
The advance will be paid off quicker if a business indulges in more credit card transactions and similarly it’s the opposite in case of less frequent payments. Therefore, maintaining cash flow for your business is critical in paying off the advance.
Certain costs are associated with acquiring the advance and which depend on specific factors. The total amount of lump sum, factor rate and hold back percentage are three of the main factors in determining the cost of choosing this option. The average lump sum amount that is approved for merchant advance express is $10000 – $1000000. Small businesses that have a high credit score and better credit card payments are granted a higher lump sum amount and vice versa.
Merchants want to ensure that the credit card payment volume is high, which minimizes their risk. A lower lump sum also means that a higher factor rate will be charged so businesses should strategize accordingly. A high factor rate is not a preferred option for a business because it will have to pay a more significant lump sum amount back to the merchant.
After lump sum and factor rates are agreed upon, the next step is to determine the holdback percentage. It depends on the size of lump-sum advance, expected repayment period and worth of credit card transactions. The holdback percentage fluctuates daily based on the total credit payments, which ultimately affects the annual percentage yield on the merchant cash advance.
There may be some other hidden fees depending on the merchant and businesses should specifically ask about them if the merchants do not mention it themselves.
Terms and Qualifications
It takes approximately 24 hours to approve the advance and a further 2 – 5 days for the advance to be delivered. It makes it one of the quickest mediums of financing your business. The two parties decide the terms of payments by keeping all the other factors into consideration. A company should aim to pay off the merchant cash express back to the merchant as early as possible because it would result in a higher annual percentage yield for the business.
Working with the partnered credit card processor is usually a requirement of many merchants who offer the advances as it makes the collection process more comfortable for them. Most of them only approve the advance one, and the service is activated. However, you must remember that merchant cash advance is not a loan and it would not appear as one on your credit report, though, you are still equally liable to make the repayment in time.