Whether you operate a brick-and-mortar business or an e-commerce store, meeting employee salaries, overhead and other cash-dependent expenses can be difficult. A merchant cash advance is one of the most popular ways to tide your business over during a cas hflow crunch. But before you apply, it's important that you understand how merchant cash advance rates and fees work.
How Are Merchant Cash Advance Fees Structured?
A cash advance is not a loan. You receive a lump sum payment of cash in exchange for a percentage of future credit card sales. Every day (or month), you're obligated to send the merchant cash advance company a percent of receipts:
- If sales for that day are good, you send X percent
- If sales for that day are bad, you send X percent
For many businesses, the flexibility this provides is preferable to loans that require set monthly payments.
However, because merchant cash advances are not loans, they don't fall under most state usury laws. In other words, there are fewer limitations on how merchant cash advance rates and fees can be structured. As a result, you may end up paying a premium compared with traditional lending.
How Do Bank Interest Rates Compare to Merchant Cash Advances Fees?
Given the costs of merchant cash advances, why wouldn't you just take out a bank loan? In some instances, a bank loan is the way to go. But merchant cash advances have a few advantages loans don’t offer:
- The repayment terms for cash advantages offer flexibility during slow sales months. You pay a percentage of current sales instead of set monthly amounts.
- Some businesses can obtain a merchant cash advance more quickly than a bank loan because the paperwork requirements are different.
- Access to financing is more consistent. During the recent economic downtown, lending slowed, even to credit-worthy borrowers.
Keep Your Merchant Account in Good Standing
If you need cash right away and don't meet bank lending criteria, merchant cash advances can help to keep your business afloat until your company's cash flow improves.
Just make sure that you understand how cash advance fees and rates are structured within your agreement. Ask the company providing your merchant cash advance to provide a projected APR so you can comparison-shop more effectively.
If you need help understanding merchant cash advances fees, or to get started with merchant financing, speak with a BluePay agent today.