How Do Merchant Cash Advance Factor Rates Differ From Interest Rates?
A business that utilizes a merchant cash advance will typically pay back 10% to 30% or more of the amount borrowed. This percentage is known as a factor rate , and it’s most commonly expressed in decimal form. For instance, a factor rate of 10% or 30% would be represented as 1.1 and 1.3, respectively.
Unlike interest that accumulates over time and is a calculation based on depreciating principal, MCA fees are calculated once at origination. The cost is worked into your scheduled payments and doesn’t change. So if you pay off your advance in 4 months or 12, the total amount paid remains the same.
The factor rate your business cash advance lender quotes you will depend on your industry, average monthly sales, the stability of those sales, the time you’ve been in business and other risk factors.
The amount you pay will depend on the program, the amount borrowed and the term. Nowadays, most MCA agreements are of the ACH variety. Use our ACH merchant cash advance calculator to estimate the total cost of borrowing.
Is a Merchant Cash Advance Right For Your Business?
Merchant cash advances are best used to address short-term capital needs. For example, responsible use of an MCA would be to purchase inventory your business can turn around quickly to generate a profit. Companies that have success using an MCA have a clear understanding of the costs associated with this type of financing compared to the potential return on investment .
What Are the Pros and Cons of a Merchant Cash Advance?
- Quick approval process: Compared to other forms of business financing, the MCA application and approval process is less involved. After reviewing past bank statements and business information, many MCA lenders can make a funding decision within hours.
- Same-day funding available: MCAs are one of the fastest forms of financing on the market. Some merchant cash advance lenders can release funds the same day an application is approved.
- No collateral required: Merchant cash advances are a form of unsecured financing, meaning you do not have to back the advance with collateral.
- Most credit scores qualify: MCA lenders work with business owners even if their credit needs work. If you have the cash flow to support repayment, you’ll likely be eligible for an MCA.
According to the Federal Reserve Banks’ State of Small Business Credit Survey , 84% of firms that applied for merchant cash advances were approved. This was the second-highest financing approval rate; equipment financing was the first.
- Higher fees: On average, merchant cash advances are more expensive than other forms of financing.
- Shorter repayment terms: MCAs are a short-term financing option. Though repayment periods will vary by lender and the individual qualifications of the borrower, many times advances must be paid back in 12 months or less.
- Lower borrowing amounts: Advance amounts are based on your sales potential. Therefore the amount you qualify for may be lower than other forms of financing.
- Daily or weekly repayment frequency: MCA lenders may deduct funds on a daily or weekly basis, which can impact cash flow.
What payday loans WI Are the Requirements for a Merchant Cash Advance?
Merchant cash advance providers evaluate risk differently than loan lenders. Unlike conventional financing, where personal and business credit scores are more heavily weighted, MCA providers consider the consistency of your historical deposits and average daily balances to determine future revenue and approval amount.
- Industry: Different industries present different levels of risk to MCA providers. For example, sectors that routinely experience periods of high and low sales are riskier for lenders to work with, resulting in potentially higher factor rates.