Frequently when small business owners take a closer look at merchant cash advances, they come away pretty confused.
Here's why:
From the outside looking in, a merchant cash advance can sound easy and reasonable.
A prospective borrower in urgent financial need likely won’t take enough time to crunch all of the numbers. Then by the time they figure out that “easy” merchant cash advance is not exactly reasonable, it’s often too late. They’re stuck in a deal that might not be favorable.
The potential problems of merchant cash advances are twofold:
1. The annualized interest rates (APR) are very high.
2. Repayment is structured over a very short time frame, which means the payments can put a major crimp in your company cash flows.
What are Merchant Cash Advance Interest Rates and Payments?
The rates and terms on merchant cash advances vary, but many are designed to require payback in as short a time period as 6-9 months at "factor rates" of 1.25 or greater. This means payback will be a $1.25 for every $1 borrowed in the form of daily payments.
The payback structure is set as a percentage of your daily credit card sales (typically 10 to 20%), but with a reasonable approximation of the amount of time it will take to pay back the advance.
By quoting the loan as daily payments, the numbers sound small, but here is how the real numbers would shake out:
In a contract for $10,000 that had to be paid back in the form of $12,500 over the course of 6 months, payments would average about $100 per day. Sure, at first glance this may sound small. Many people think this is a 50% interest rate loan, but when calculated as an APR the interest rate is 134.64%.
In addition to high rates, merchant cash advances are not considered a loan, and as such have no discount for early repayment. While there technically is no prepayment penalty, once a contract is signed, the borrower is on the hook for the full repayment amount. This results in early payments benefitting the lender only and not the borrower.
Believe it or not, the real problem a good number of borrowers have with merchant cash advances isn't the rates it's the payments. With an average of 20 business days per month, $100 per day in payments amounts to $2,000 monthly for every $10,000 borrowed. Further, the first payment starts the very next business day after receiving the funds.
Many small business owners resort to this type of financing because they are unaware of other alternatives. It's common that instead of solving problems, the drain on cash flow created by utilizing this sort of financing can take a business "out of the frying pan and into the fire". Many borrowers start out with one merchant cash advance and ultimately end up "stacked" carrying multiple (sometimes up to 4 or 5) contracts at once, which can ultimately suffocate a small business.
Depending on your situation, there are often much more reasonable and practical avenues for you to get the cash needed to maintain your business’ cash flow.
Here are 5 alternatives:
1. Short Term Working Capital Loans
As the term "merchant cash advance" has become kind of a dirty word in entrepreneurial circles, many of the companies offering this product have added "working capital loans" to their product lines.
Most working capital loans are very similar to merchant cash advances with the main difference being that instead of paying back a percentage of daily credit card receipts, the payback will come via a "daily ACH" that is a fixed amount.
In most cases, while the payback mechanism may vary, the payback periods and interest rates can be just as high as a merchant advance loan.
There's really no way around the fact that if you borrow money that has to be paid back in a very short time frame, the payments will be very high and there is a high probability you'll need to go back for more money as soon as you can be approved for more.
2. Collateralized Loans
The New York Times cites evidence that 27.5 percent of entrepreneurs use real estate equity to fund a business. Small business owners often access funds using a home equity loan.
Using a home as a source of capital can be particularly dangerous because it increases the chances of losing your home during any rough times for the company.
Tapping home equity lines requires having a home below 80% loan-to-value (LTV). Unless a business owner owes significantly less than a home is worth, using real estate to finance a business will be unavailable. Increases in housing debt may also make it more difficult to refinance a home.
Some companies that own real estate or equipment that is fully paid for can borrow money against those assets and pay it back monthly over a set period of time, typically 2-4 years.
While this sort of financing can be more reasonable than either a merchant cash advance or a short-term working capital product, there are two problems many business owners run into with these loans:
Most small businesses looking to utilize equipment as collateral do not own the type of equipment that would typically be considered. Lenders that conduct these transactions typically prefer to look at work vehicles and heavy equipment such as a crane or an excavator.
When someone does own equipment that can qualify, they are typically offered 50% of "liquidation" or "auction" values, which is always much, much less than the actual market value of the equipment.
Additionally, if you own real estate that has a significant amount of equity, a product that can sometimes be utilized is what's called a "hard money loan." Hard money loans are based on the value of a property, minus anything owed against it and usually go up to 65% loan-to-value, or "LTV."
As an example, a business owner who owned a property worth $300,000 might be able to access $195,000, less anything owed against the property, so if $100,000 was owed against a $300,000 property a typical hard money offer could be for $95,000. Hard money rates aren't low with origination fees often 10% or higher.
The other challenge with hard money loans: A real estate transaction requires appraisals, titling, and significant paperwork, which means that the amount of time it takes to get money can often run weeks, not day. Don’t be surprised if the costs of title work and appraisals runs well over $1,000.
Additionally, hard money is a "short-term" solution. Like the other alternatives, discussed, the money has to be paid back within a short period of time (typically a year or less). If something happens that keeps you from paying back the money on time, since the transaction is collateralized with real estate, the lender can repossess the property.
3. Credit Cards
Many business owners are surprised when they find out taking a cash advance out on credit cards is much cheaper than utilizing a merchant cash advance loan. Typical credit card cash advance charges are 3-5% upfront and average around a 25% APR.
The two drawbacks for most business owners to utilizing credit card cash advances to fund a business are that many don't have the available credit limit to fully fund their business' needs. Additionally, heavy credit card utilization, (i.e. anything over 50% on any one card), can severely impact a credit score. This matters because both drawbacks can limit future borrowing ability and make interest rates a lot higher for future borrowing activity.
4. Invoice Factoring
For businesses with outstanding accounts receivables, a process known as "invoice factoring" can sometimes be utilized as an alternative to the merchant cash advance.
This sort of financing is coordinated by receiving money on invoices that a company is waiting to be paid on early in exchange for less money than is actually owed once the outstanding amounts are paid.
While typically lower in cost than a merchant cash advance, these loans aren't typically a "first choice" for most part because:
Annualized interest rates on factoring contracts are 60% and higher in most cases. Many trades, such as construction and health services, will find there is very little interest among the financiers on lending against outstanding invoices in their industries.
In most cases, utilizing a factoring arrangement requires factoring all invoices, not just a few, and most of these contracts keep a company "locked in" for 12 months or longer.
Many of these factoring contracts are with recourse and require a personal guarantee. "Recourse" is when the factoring company has the right to demand payment or sue for damages if a customer doesn't pay. Signing of a personal guarantee means a factoring company can go after personal assets in addition to business assets to satisfy any judgments due to nonpayment of any invoice.
5. Small Business Term Loans
A small business term loan, such as what is offered at Zion Finance - Lend Up, can often be a very practical alternative. Depending on your credit situation, loans can often be repaid up to ten years.
Here are the biggest differences between the Zion Finance - Lend Up product and a merchant cash advance: Terms loans have a payback period ranging from 2 to 10 years (versus 6-12 months for most merchant cash advances).
Minimum payments are usually much lower, while if calculated as a monthly payment, a $10,000 merchant cash advance could result in payback from $2,000 to $2,400 over a six-month time period, minimum payments using Zion Finance - Lend Up for the same $10,000 would range from $220.48 to $1,321.29 depending on the rates and terms.
First payment is due 15-45 days after receiving funds.
No prepayment penalties with Zion Finance - Lend Up (pay back at any time to reduce the amount of interest you pay).
Utilizing Zion Finance - Lend Up may build your business and personal credit (Zion Finance - Lend Up reports to both types of credit bureaus).
While most merchant cash advance providers require 6 months’ time in business, Zion Finance - Lend Up only requires 2 months in business.
When business owners consider alternative funding, the speed of receiving the funds cannot over shadow the repayment terms. Zion Finance - Lend Up not only understands, but also backs it up by providing more flexible terms.
WE CAN HELP YOU WITH A QUICK LOAN!
Do you need a quick loan today? Zion Finance - Lend Up can help you with the loan you need, we offer personal loans and loans for business development. To apply e-mail: zionloanfirm.ltd@aol.com
Here's why:
From the outside looking in, a merchant cash advance can sound easy and reasonable.
A prospective borrower in urgent financial need likely won’t take enough time to crunch all of the numbers. Then by the time they figure out that “easy” merchant cash advance is not exactly reasonable, it’s often too late. They’re stuck in a deal that might not be favorable.
The potential problems of merchant cash advances are twofold:
1. The annualized interest rates (APR) are very high.
2. Repayment is structured over a very short time frame, which means the payments can put a major crimp in your company cash flows.
What are Merchant Cash Advance Interest Rates and Payments?
The rates and terms on merchant cash advances vary, but many are designed to require payback in as short a time period as 6-9 months at "factor rates" of 1.25 or greater. This means payback will be a $1.25 for every $1 borrowed in the form of daily payments.
The payback structure is set as a percentage of your daily credit card sales (typically 10 to 20%), but with a reasonable approximation of the amount of time it will take to pay back the advance.
By quoting the loan as daily payments, the numbers sound small, but here is how the real numbers would shake out:
In a contract for $10,000 that had to be paid back in the form of $12,500 over the course of 6 months, payments would average about $100 per day. Sure, at first glance this may sound small. Many people think this is a 50% interest rate loan, but when calculated as an APR the interest rate is 134.64%.
In addition to high rates, merchant cash advances are not considered a loan, and as such have no discount for early repayment. While there technically is no prepayment penalty, once a contract is signed, the borrower is on the hook for the full repayment amount. This results in early payments benefitting the lender only and not the borrower.
Believe it or not, the real problem a good number of borrowers have with merchant cash advances isn't the rates it's the payments. With an average of 20 business days per month, $100 per day in payments amounts to $2,000 monthly for every $10,000 borrowed. Further, the first payment starts the very next business day after receiving the funds.
Many small business owners resort to this type of financing because they are unaware of other alternatives. It's common that instead of solving problems, the drain on cash flow created by utilizing this sort of financing can take a business "out of the frying pan and into the fire". Many borrowers start out with one merchant cash advance and ultimately end up "stacked" carrying multiple (sometimes up to 4 or 5) contracts at once, which can ultimately suffocate a small business.
Depending on your situation, there are often much more reasonable and practical avenues for you to get the cash needed to maintain your business’ cash flow.
Here are 5 alternatives:
1. Short Term Working Capital Loans
As the term "merchant cash advance" has become kind of a dirty word in entrepreneurial circles, many of the companies offering this product have added "working capital loans" to their product lines.
Most working capital loans are very similar to merchant cash advances with the main difference being that instead of paying back a percentage of daily credit card receipts, the payback will come via a "daily ACH" that is a fixed amount.
In most cases, while the payback mechanism may vary, the payback periods and interest rates can be just as high as a merchant advance loan.
There's really no way around the fact that if you borrow money that has to be paid back in a very short time frame, the payments will be very high and there is a high probability you'll need to go back for more money as soon as you can be approved for more.
2. Collateralized Loans
The New York Times cites evidence that 27.5 percent of entrepreneurs use real estate equity to fund a business. Small business owners often access funds using a home equity loan.
Using a home as a source of capital can be particularly dangerous because it increases the chances of losing your home during any rough times for the company.
Tapping home equity lines requires having a home below 80% loan-to-value (LTV). Unless a business owner owes significantly less than a home is worth, using real estate to finance a business will be unavailable. Increases in housing debt may also make it more difficult to refinance a home.
Some companies that own real estate or equipment that is fully paid for can borrow money against those assets and pay it back monthly over a set period of time, typically 2-4 years.
While this sort of financing can be more reasonable than either a merchant cash advance or a short-term working capital product, there are two problems many business owners run into with these loans:
Most small businesses looking to utilize equipment as collateral do not own the type of equipment that would typically be considered. Lenders that conduct these transactions typically prefer to look at work vehicles and heavy equipment such as a crane or an excavator.
When someone does own equipment that can qualify, they are typically offered 50% of "liquidation" or "auction" values, which is always much, much less than the actual market value of the equipment.
Additionally, if you own real estate that has a significant amount of equity, a product that can sometimes be utilized is what's called a "hard money loan." Hard money loans are based on the value of a property, minus anything owed against it and usually go up to 65% loan-to-value, or "LTV."
As an example, a business owner who owned a property worth $300,000 might be able to access $195,000, less anything owed against the property, so if $100,000 was owed against a $300,000 property a typical hard money offer could be for $95,000. Hard money rates aren't low with origination fees often 10% or higher.
The other challenge with hard money loans: A real estate transaction requires appraisals, titling, and significant paperwork, which means that the amount of time it takes to get money can often run weeks, not day. Don’t be surprised if the costs of title work and appraisals runs well over $1,000.
Additionally, hard money is a "short-term" solution. Like the other alternatives, discussed, the money has to be paid back within a short period of time (typically a year or less). If something happens that keeps you from paying back the money on time, since the transaction is collateralized with real estate, the lender can repossess the property.
3. Credit Cards
Many business owners are surprised when they find out taking a cash advance out on credit cards is much cheaper than utilizing a merchant cash advance loan. Typical credit card cash advance charges are 3-5% upfront and average around a 25% APR.
The two drawbacks for most business owners to utilizing credit card cash advances to fund a business are that many don't have the available credit limit to fully fund their business' needs. Additionally, heavy credit card utilization, (i.e. anything over 50% on any one card), can severely impact a credit score. This matters because both drawbacks can limit future borrowing ability and make interest rates a lot higher for future borrowing activity.
4. Invoice Factoring
For businesses with outstanding accounts receivables, a process known as "invoice factoring" can sometimes be utilized as an alternative to the merchant cash advance.
This sort of financing is coordinated by receiving money on invoices that a company is waiting to be paid on early in exchange for less money than is actually owed once the outstanding amounts are paid.
While typically lower in cost than a merchant cash advance, these loans aren't typically a "first choice" for most part because:
Annualized interest rates on factoring contracts are 60% and higher in most cases. Many trades, such as construction and health services, will find there is very little interest among the financiers on lending against outstanding invoices in their industries.
In most cases, utilizing a factoring arrangement requires factoring all invoices, not just a few, and most of these contracts keep a company "locked in" for 12 months or longer.
Many of these factoring contracts are with recourse and require a personal guarantee. "Recourse" is when the factoring company has the right to demand payment or sue for damages if a customer doesn't pay. Signing of a personal guarantee means a factoring company can go after personal assets in addition to business assets to satisfy any judgments due to nonpayment of any invoice.
5. Small Business Term Loans
A small business term loan, such as what is offered at Zion Finance - Lend Up, can often be a very practical alternative. Depending on your credit situation, loans can often be repaid up to ten years.
Here are the biggest differences between the Zion Finance - Lend Up product and a merchant cash advance: Terms loans have a payback period ranging from 2 to 10 years (versus 6-12 months for most merchant cash advances).
Minimum payments are usually much lower, while if calculated as a monthly payment, a $10,000 merchant cash advance could result in payback from $2,000 to $2,400 over a six-month time period, minimum payments using Zion Finance - Lend Up for the same $10,000 would range from $220.48 to $1,321.29 depending on the rates and terms.
First payment is due 15-45 days after receiving funds.
No prepayment penalties with Zion Finance - Lend Up (pay back at any time to reduce the amount of interest you pay).
Utilizing Zion Finance - Lend Up may build your business and personal credit (Zion Finance - Lend Up reports to both types of credit bureaus).
Zion Finance - Lend Up will lend up to 2 times your monthly revenues, while a merchant cash advance provider will typically only advance 1 month of revenues, and only that portion of your
While most merchant cash advance providers require 6 months’ time in business, Zion Finance - Lend Up only requires 2 months in business.
When business owners consider alternative funding, the speed of receiving the funds cannot over shadow the repayment terms. Zion Finance - Lend Up not only understands, but also backs it up by providing more flexible terms.
WE CAN HELP YOU WITH A QUICK LOAN!
Do you need a quick loan today? Zion Finance - Lend Up can help you with the loan you need, we offer personal loans and loans for business development. To apply e-mail: zionloanfirm.ltd@aol.com
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