WHAT IS A BUSINESS CASH ADVANCE?

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WHAT IS A BUSINESS CASH ADVANCE?

August 3, 2017 Business Funding Confirm Capital Small Business Financing Small Business Loan Working Capital 0

BUSINESS CASH ADVANCE

A business cash advance or merchant cash advance is a short-term funding system that allows businesses small, medium or big to sell their future assets hereby giving them access to funds now. The funds provided through this system are typically short termed (3-12 months), the repayment amounts are in small amounts which can be done on a daily or weekly basis. Repayment begins almost immediately unlike bank loans that have longer periods for repayment.

Cash advances are not exactly a loan because the lender either claims a portion of your sales or debits your bank account daily until the advance is fully refunded. They are attractive because the speed of approval is much faster than the traditional loans thereby providing fast funding to business owners for urgent needs. This among other characteristics has made it popular despite the higher cost of funds.

A cash advance is usually approved in less than two working days after all needed paperwork is completed but can be as little as half a day with a motivated client.

HOW DO I GET A BUSINESS CASH ADVANCE?

Business cash advances or small business loans are very accessible as earlier stated however, it is recommend that if you have collateral and very good credit you should try traditional loans services from a bank first. This is going to be the lowest cost of funds available. If you don’t have the credit or collateral needed to qualify for a bank loan, cash advances are good alternatives. The following are a few document that need to be provided to have access to the funds;

  1. A copy of a valid means of identification of ownership, preferably driver’s license.
  2. A copy of business bank statements for the last 3 months.
  3. A copy of a voided company check so the advance can be paid into your account directly.
  4. Duly completed and signed credit application form by the director, officer or owner of the client’s company.

Some lending companies may require more months of statements depending on the business. Seasonal businesses require one year of statement, for example, to get the best funding amount for the business. Credit card statements may also be required if the payback is requested as a percentage of credit card sales.

HOW IS A BUSINESS CASH ADVANCE CALCULATED?Business Cash Advance

For a cash advance of $50,000 with a factor rate of 1.20, the business will pay $10,000 on the cost of the money, meaning the total amount to be repaid is $60,000 ($50,000 + $10,000). To repay the amount due in 200 days, a sum of $300 will have to pay daily to the cash advance provider. Sometimes the interest rate can be as high as 1.50 depending on the amount of advance to be sourced and the businesses qualifications.

A careful consideration of the interest rate/advance factor and the duration of repayment is essential because the cost of credit is higher than for the traditional loan. This is commonly called, the “cost of the money.”  Most business cash advance customers consider the cost of the money on a job to job basis or on a monthly basis as to preserve healthy cash flow.

PROS AND CONS

Pro: No collateral because the advance company is buying your receipts at a discount. Traditional loans can be as high as 25% deposit to have access to the money you need.

Pro: Repayments are flexible and can be done on a weekly or daily basis. Also can be repaid as a fixed amount from a business bank account or via credit card sales transactions.

Con: If the use of funds is not for the right reasons, the advance may set the client back or further hurt their cash flow. It is important that using the funds will improve sales revenue so that the company grows. If a company takes the money and doesn’t do enough with it, the result will be increased expenses instead of return.

Pro: Business cash advances are processed quickly compared to a traditional loan and this allows more liquidity on the part of a business owner. Traditional loans can take up to 3 months and tons of paperwork and time taken for approval.

Con: Cash advance fees are higher than traditional bank loans. Most companies consider the cost of the money and it makes senses. For example, a construction company is doing several jobs at the moment and cannot take on another because they don’t have the cash to complete it. If they used a business cash advance and factored the cost of money in to the job cost. It may work for them and their customer.

Pro: Advance companies generally give more consideration to the business performance (credits vs debits on bank statement) than to individual financial stand (FICO or credit ratings), this makes business cash advance an alternative to those that cannot make the traditional loan.

We offer Business Cash Advance services at Confirm Capital. Learn More 

Other resources on this subject include:

https://www.nerdwallet.com/blog/small-business/merchant-cash-advance-small-business/

https://www.businessloans.com/guide/merchant-cash-advance/

 

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