8 Feature Facts – How to Get a Merchant Cash Advance
Written by Eric info@acsecapital.com
I've been involved in business for some time and now I have decided to make a commitment to providing small businesses with truely helpful information.
How to get a Merchant Cash Advance
A Merchant Cash Advance is one of the great innovations and has been around for a few years now, but it’s already become a major contributor to the financing industry among many North American businesses.
A cash advance from a provider uses your credit card terminal as a conduit to a secure loan, which is ideal for businesses with no large assets, but may have good inflows of credit card transactions each month or actual cash. There are situations when you might be able to qualify for a business line of credit, but check out our post on that with the link.
A percentage of the future revenues is taken as repayment via a lockbox facility, which makes the solution for many SMEs so attractive because of the low barrier to acquiring funding. Lets look at how to get a merchant cash advance in summary.
A Cash advance is a quick funding option which is one of the main attractions of a merchant cash advance, the qualification process for this method of funding is very straight forward, though the exciting thing for merchants is that no Collateral is needed.
However, to access a merchant cash advance solution, a few things are necessary.
Six to twelve months bank statements, FICO score, Proof of ownership, Identification (ID card, Drivers permit or Passport), SSN, Sales Receipts or Proof of sales.
Ultimately once all the items above are packaged correctly a merchant cash advance provider would be more than willing to have a favourable review of your application.
Breakdown of how to get a Merchant Cash Advance and its Features
| Advance | Up to 100% |
| Repayment | Until the Invoice is Paid |
| Factor Rate | 1x to 1.5x |
| Availability | 24 to 72 hours |
Qualifying for a Merchant Cash Advance
Imagine being involved in an emergency situation where you just got a last minute purchase order from a customer that needs to be filled within a week, but you would only be able to access a loan facility from your bank within a 3 week period, assuming you don’t have a line of credit to draw on.
This would be detrimental to that PO, making the Merchant Cash Advance an amazing opportunity to take advantage of.
When it comes to the qualification, usually you will only need to fill out a one page application form requiring the basic information about the business, your FICO score, Drivers permit number, 6 to 12 months bank statements, social security number and your application would be considered complete.
To trump the ease of applying, would be there is no burden of trying to find collateral to pledge towards the advance as the provider is solely interested in the future sales of the company and how often deposit are being made to the accounts.
Credit scores is a thing that can make or break a borrowers spirits because many time you do what you have to do and as a byproduct of that, life impacts your credit score.
Again this advance does not look too heavily upon that once the business is generating revenue which can sustain the payments required.
The flexibility of payments would also allow for the business owner to divert focus to other areas of the business, which may need continuance of strategy rather than pulling cash away from departments which may need it for the company to produce the same said cash flow.
From a covenant perspective it is very light, allowing you to freely and nimbly make decisions for your business without constraints or the worry of legal implications by breaking covenants.
PROS
Funding before the invoice payment Invoices are collateralized Funding extended based on Clients Creditworthiness
CONS
Higher Fees
Invoice Aging
The advantages here are, you can run your business the way you see fit, in an unimpeded way.
Leaving you much more agile in the competitive spaces most small businesses are already in. You may even be in a position with some added funding to try for a few larger accounts and expand into servicing higher caliber customers.
Maybe taking on new staffing was always something in the pipeline for your business. Or it could be the leasing of that new machine you needed to produce 1000 more units per week to service a brand new contract.
I am sure you will be sleeping better at night knowing you can fulfill orders when PO’s come in, which would translate into greater customer service, more leverage over under performing competitors, greater brand authority among your customers.
I mean the list could go on and on.
“Have a look at this summarized video on Merchant Cash Advances”
How do you evaluate a Merchant Cash Advance?
Merchant cash advances and cash advance funding have some disadvantages that you should be aware of. Before getting funding, weigh these disadvantages against the potential benefits.
- Higher Cost – These higher cost is dirrectly correlated to the risk that the lender is taking with funding your business. If the risk to the lender is on the lower end of the scale then you would probably be in the 9% range and on the high end you would be in the 50% range above your funding. Obviously this is not in trend with the low interest rates available today which you have to take into consideration many businesses are fighting for. At the same time, the middle market and higher quality companies with very low risk are also competing for the low interest rate inventory (Money). Traditional lenders are going to prioritize who they allocate resources to, and if your company is not within the upper echelon of prioritized customers then your’re going to have to go to a merchant cash advance lender in other cased revemue based lenders. Your repayment to a merchant cash advance lender is determined by introducing a multiplier to the funding total otherwise called a factor rate. The factor is usually between 1.09 to 1.50 which we are seeing realistically falling in the 1.25 to 1.49 range in this market as of May 2020. Remember this environment is not the best and therefore many companies are experiencing cash flow issues, supplychain issues, distribution issues, HRM issues and more, so the risk is significantly higher for any lender at this time. Here is a quick example. If you apply for $50,000 with an ideal financial situation, you may receive an offer something that looks like this: Funding Amount $50,000 X 1.25x Factor Rate = $62,500 Repayment.
- The Solution is Short Term – The time frames we are seeing in the industry is from 3 months to 24 months with a very very limited amount going beyond 24 months. The situations which go beyond 24 months are special case scenarios which usually start out as either a 12 month or 24 month term funding. It is clear that the rates are higher because of the shorter terms. If the terms were longer the rates would be less but due to the higher risk of the investment these lenders are seeking a ROI over a shorter time horizon. Essentially this becomes a problem for the company if the funding was accessed for all the wrong reasons.
- Misdiagnosed Problem – For the business owners who may have needed some quidance regarding the management of their finances, they fall into a cash management problem at times. Actually it is a common problem amoungst small business owners. Because of the quick injection of funding and the many times daily or weekly payment schedules, the repayments derisk’s the investment just as quick. Concurrently this may encourage business owners to refinance uneccesarily everytime they have an issue with the business which may not need cash thrown at it.
- Assessment – Let’s assume you qualify for funding of $100,000 which requires repayment of $125,000 in 12 months. The payback is in equal installments and is scheduled weekly. Assuming that each month is 4 weeks, making the weekly payment if we fast forward through the schedule to month 3 you would have paid $31,250 which leaves you with a balance of $93,750. In month 9 you would have roughly paid the funded amount back to the lender ($93,750) with a balance of $31,250. For many small business owners that don’t factor in Murphy’s Law face grave danger. Let’s say that their may have been a shift in the supply of materials or inventory to the company within the periods of repayment to the lender. The business owner may be inclined to seek an additional advance to curtail the lapse in delivery time by their suppliers. Which is called “Stacking”. Ultimately this is dangerous if the company does not have the EBITDA to support it. But very little attention is paid to the term EBITDA by Merchant Cash Advance lenders. They look at the top line (Revenue). So most times you may still qualify for the advance. Significantly increasing the risk of default payments if not very carefully monitored.
- High risk of providing funding based on future sales – This is a higher risk way of assessing risk and providing financing. I am a bit on the fence about this though because at the end of the day, isnt this what all lenders are doing essentially? Providing you with funds which hopefully you will repay at a later date. Look, it comes down to your ability to manage those funds and assess your ability to repay upfront. If that assessment is done incorrectly you face peril. If done correctly your company will be fine.
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