Merchant Funding

What is a Merchant Cash Advance Factor Rate and How Can I Calculate My Payments?

What is a Merchant Cash Advance Factor Rate and How Can I Calculate My Payments MCA Small Business Loans.jpg

What is a Merchant Cash Advance Factor Rate and How Can I Calculate My Payments?

A merchant cash advance (MCA) or business cash advance can provide small business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and/or bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage. The remittances are drawn from the business customer on a daily, or weekly basis until the obligation has been met. A merchant cash advance or business cash advance is not technically a business loan and as such, not limited in what rates they charge or what terms they establish. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity, or cash deposits and need financing quickly.

Conventional loans are the most common type of lending for small businesses, and what you would receive from a bank. They provide short-term, intermediate and long-term funding for businesses. Rates differ between each lender and depend on the overall credit risk of the business applying for the loan. The interest rates charged can either be fixed for the term of the loan at the time of closing, floating (for example the rate may fluctuate with the “prime rate”) or perhaps the loan will be fixed for a period of time and then float. A higher perceived risk will generally result in a higher interest rate. The monthly payment of conventional loans will generally include both interest and a principal reduction payment (commonly referred to as amortization). The amount of the payment is determined by the rate and term of the loan. Some loans are structured so that the monthly payments will completely repay the loan by the end of the term (also referred to as a self-amortizing loan) while other loans may be structured so that there is a balance remaining due at the end of the term (called a balloon payment). The latter will require the borrower to either refinance the loan at the end of the term or repay it from other available funds. Payment schedules, which are normally monthly, can be changed to quarterly and even annually if needed and agreed upon by both parties.

Most small business owners these days are not qualifying for traditional bank financing for one reason or another, and many of these businesses find alternative finance companies such as LVRG, providing daily debit or daily draw merchant cash advance products that are calculated using "factor rates." These are great small business funding options, if you need cash in a hurry. Unlike interest rates, which are expressed in percentages, factor rates are usually given in decimal figures. Factor rates usually vary from 1.2 to 1.5. The rate you get will depend on the length of time you’ve been in business, your industry, the average of your monthly sales, and the stability of those sales. Simply put, the higher the factor rate, the greater the risk.

You’ll need to calculate the total amount you need to repay in order to find the factor rate. Multiply the amount you need to borrow by the factor rate. For instance, If you’re borrowing $100,000 and the factor rate is 1.2, you’ll need to repay a total of $120,000. Taking that one step further, you then divide the total amount you owe, by the time in which you have to pay. Most merchant cash advances and cash flow type financing options are paid back daily, not including weekends or holidays; so you figure 21 days per month.

Let’s do some math here. If you borrow $100,000 with a 1.2 factor rate on a 12 month term; you multiply $100,000 X 1.2, which equals $120,000. That’s the total in which you will pay back over the course of the term - here is 12 months. You then divide $120,000 by 12 (months), giving you $10,000. $10,000 is how much you would be paying back on a monthly basis. Next you divide $10,000 by 21 days in the month (remember, we don’t include weekends or holidays) which comes out to $476 per day. So essentially, you will pay back $476 per day (21 days per month) for the next 12 months. When it ends, you would have paid back the full amount of $120,000.

You need to be aware that factor rates can make expensive loans appear cheaper. Also, you’re required to pay the interest up front, so paying off the loan early won’t save you interest charges. You may receive a discount off the total amount owed, if paid early and in full.

We can’t stress this enough: factor rates are not the same as interest rates. Factor rates are calculated only once using the original loan amount. Interest rates are calculated multiple times and are based on the depreciating capital.

Factor rates are different from APR financing, in that at the beginning of the life of the loan or advance, the lender calculates all of the interest due, and works it into your scheduled payments. With APR, financing interest accrues on the depreciating principal amount, so your interest payments get smaller and smaller as you make more payments.

Hope this helps! Check out our knowledge center for more great small business tips!

 

Should I choose a merchant cash advance as a funding option, and is it right for my small business?

Should I choose a merchant cash advance as a funding option, and is it right for my small business.jpg

Among business analysts, lenders and small business owners alike, there’s continued controversy over the value and potential risks of a little understood lending alternative called the merchant cash advance. While this quick capital option continues to be shrouded in negative speculation, an increasing number of business owners seem to be availing themselves of a merchant cash advance, and with good results. So just what is a merchant cash advance, and how did it get such a bad reputation?

Although Often Misunderstood, a Small Business Cash Advance or Credit Card Merchant Cash Advance Could Work Wonders For Your Business...If Used Correctly!

Let’s break down the facts:

In a nutshell, A Merchant Cash Advance (MCA) can provide business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met. An MCA is not technically a small business loan and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity and need financing quickly.

Think all small business loan lenders and funding companies are created equal? THINK AGAIN!

Merchant cash advances are classified as commercial transactions, not loans. Here are the distinguishing characteristics of merchant cash advances:

No Fixed Terms. Providers estimate the term for repayment based on the business’ sales history. The customer is charged a set fee, referred to as a factor rate and there are no interest charges.

Cash Advances Are Unsecured. The provider does not receive any collateral or guarantees, accepting all risk of the client going out of business.

Minimal Documentation. Often, a client can simply provide six months of processing statements, two months of bank statements, a copy of a mortgage statement or property lease, and a driver’s license.

No Fees. There are no late fees or penalties attached to the product.

Fast Approval and Funding. Most cash advance providers can approve and fund an application in 2-7 days, LVRG can get you funded in less than 1.

Daily Repayment. This varies according to the volume of the merchant, and changes according to the business cycle. The provider receives a set percentage or amount of the merchant’s daily card settlement batch.

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Merchant Cash Advance - A Simple, Quick Way To Grow Your Business

Simply put, for small businesses who need cash immediately and don’t qualify for a traditional loan, an MCA could be a lifesaver. Despite the controversy, here are a few reasons this lending alternative deserves a second chance:

Fast access to cash

Cash advance applications typically require less paperwork and have faster turnarounds than traditional loans. In fact, LVRG is able to transfer lump sum capital in as little as a day in some cases, which can be lifesaving for a business with an unexpected cash flow emergency.

A good option for bad credit

Merchant cash advances biggest advantage as a loan product is that it opens up a channel for business owners with bad credit to get liquid cash. Additionally, the customer’s credit score isn’t as important as their future sales projections, given that the provider is paid back through a percentage of daily credit card sales.”

Flexible return payment

With a traditional loan, the same minimum payment on principal and interest is due month to month, regardless of whether business is in a slump. This can be a big challenge for seasonal businesses that don’t have a regular cash flow. But because a merchant cash advance is repaid through a fixed percentage of daily sales, borrowers have the flexibility to repay more when sales volume is high and less during slower sales periods.

No collateral required

If an entrepreneur doesn’t have significant personal assets to leverage, traditional bank loans can be almost impossible to obtain. And even for business owners who do have significant home equity or other assets to be used for collateral, the risk that entails doesn’t always sit well. One benefit of the MCA model for borrowers is that no collateral is required, meaning if the business fails, the provider has little recourse to collect.

With all that said, it's imperative you understand that not all merchant cash advance lenders are created equal. There is no barrier to entry or regulation in the merchant cash advance industry, which is why anyone and everyone seems to be selling merchant cash advances these days. The reality is, most of the employees at merchant cash advance funding companies have no knowledge, background, education, or experience in finance, or business. Which leads to a very scary situation, as these people are offering highly specialized advice, without knowing what they're even talking about. So they essentially are providing advice to small business owners based upon their commission scale, not what's in the best interest of the business.

  • Do you know what the level of education is needed to offer small business loans, merchant cash advances "MCA's" and other small business funding products? NONE
  • Do you know how many certifications are required to offer financing advice? NONE
  • Do you know how many courses are needed to work at a funding company? NONE
  • Do you know how much regulation is behind the small business loan industry? NONE

Think a Merchant Cash Advance is Bad for Business? Think Again...

A decade ago there were only about ten Merchant Cash Companies in existence. Today there are thousands. There is wide variation between the pricing and terms across MCA providers so it is very important to know what lenders are out there, and the fees attached. Furthermore, not all Merchant Cash Advance lenders are created equal and many are only interested in increasing their bottom line, not yours. So, it's imperative you choose wisely. LVRG is a team of the right people working with the right data getting you the right-sized funding for your business. At LVRG, we believe we are different from other lending firms. We never set out to be the biggest, but we do strive to be the best. Our deep sense of integrity, professionalism, and commitment to the spirit of entrepreneurialism propel our determination to provide assistance to small business owners in a challenging economic climate. Hope this helps… For more, feel free to get in touch!

 

What is the underwriting methodology in a merchant cash advance?

What is the underwriting methodology in a merchant cash advance?

A business that uses a Merchant Cash Advance will typically pay back 15% – 40% or more of the amount borrowed. This percentage is called the factor rate.

Note: there’s a difference between the hold-back amount that a small business pays every day (as a percentage of their sales receipts) and the repayment amount for the entire advance. There could, for instance, be a hold-back of 15%, and a repayment of 30%, so it’s important for business owners to understand this distinction.

The hold-back percentage is based on:

  • The amount of funds a business receives
  • How long it will take to pay back the money
  • How big the monthly credit card sales are

For Example: A business is advanced $10,000 and agrees to pay back $13,000. This means the payback, or factor rate, is 30%. Moving forward, the business agrees to have 15% of the business’ credit card transactions withheld by the advance company (the holdback) until the $13,000 is collected. If the business is averaging $14,500 a month in credit card sales, approximately $2,160 would be withheld each month and the advance would be paid back in roughly six months.

Interested to learn more? Merchant Loans: Cash Advance Business Loans Simplified

How does 'split withholding' work in merchant cash advances?

The discount rate or fee charged to the business can vary drastically from provider to provider and greatly exceed the in Annual Percentage Rate (APR) charged for traditional business loans and SBA loans. Providers typically quote the interest rate on a monthly basis which would be between 5% to 17%. This monthly rate is then charged to the amount of funding that is outstanding to the business.

The collection of the funds may vary as well and providers may collect their share on a daily, weekly or monthly basis. There are typically three repayment methods used by advance providers which are outlined as follows:

  1. Split Withholding is the most common where the credit card company will split the sales between the business and finance company per an agreed portion.

  2. Lock Box or Trust Bank Account Withholding is where all credit card sales are deposited into a bank account controlled by the MCA provider and then a portion is forwarded on to the business after an agreed amount plus fees go to the provider.

  3. ACH Withholding is where the finance company receives credit card processing information and deducts its portion directly from the business checking account via ACH.

What is a merchant cash advance and what industries are they good for?

Among business analysts, lenders and small business owners alike, there’s continued controversy over the value and potential risks of a little understood lending alternative called the merchant cash advance. While this quick capital option continues to be shrouded in negative speculation, an increasing number of business owners seem to be availing themselves of a merchant cash advance, and with good results. So just what is a merchant cash advance, and how did it get such a bad reputation? Let’s break down the facts:

In a nutshell, A Merchant Cash Advance (MCA) can provide business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met. An MCA is not technically a small business loan and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity and need financing quickly.

Merchant cash advances are classified as commercial transactions, not loans. Here are the distinguishing characteristics of merchant cash advances:

No Fixed Terms. Providers estimate the term for repayment based on the business’ sales history. The customer is charged a set fee, referred to as a factor rate and there are no interest charges.

Cash Advances Are Unsecured. The provider does not receive any collateral or guarantees, accepting all risk of the client going out of business.

Minimal Documentation. Often, a client can simply provide six months of processing statements, two months of bank statements, a copy of a mortgage statement or property lease, and a driver’s license.

No Fees. There are no late fees or penalties attached to the product.

Fast Approval and Funding. Most cash advance providers can approve and fund an application in 2-7 days, LVRG can get you funded in less than 1.

Daily Repayment. This varies according to the volume of the merchant, and changes according to the business cycle. The provider receives a set percentage or amount of the merchant’s daily card settlement batch.

LVRG Funding, America's go-to small business funding company is aggressively funding working capital and cash flow solutions to the following industries:

  • Animal training, grooming, boarding
  • Landscape services
  • Art, picture frames & decorations retail
  • Lock & key services
  • Beach & water sports equipment rental & services
  • Luggage & leather goods
  • Beverage stores, non-alcoholic - retail
  • Meat & fish markets - retail
  • Bicycle & motorcycle rental services
  • Medical equipment repair
  • Boiler & heating repair
  • Music & drama schools
  • Bridal shops - retail
  • Nurseries & garden centers - retail
  • Candy & chocolates - retail
  • Nutrition specialists
  • Chiropractors Optical goods - retail
  • Commercial photography
  • Optometrists
  • Computer maintenance & repair
  • Packaging & labeling services
  • Personal development schools
  • Pets & pet supplies - retail
  • Customized clothing & apparel - retail
  • Psychiatrists & psychoanalysts
  • Dairy products - retail
  • Psychologists, psychotherapists & hypnotists
  • Dance studios, schools & halls
  • Shoe repair, shoeshine parlors
  • Dentists (licensed) Shoes - retail
  • Door & Window Products - retail
  • Spas
  • Drugstores
  • Specialist physicians
  • Dry cleaning
  • Specialty hospitals
  • Electrical repair (not contractor)
  • Speech specialists
  • Florist - retail
  • Sporting goods - retail
  • Formal wear - retail
  • Swimming pools, hot tubs & sauna - retail
  • Gifts & novelties - retail
  • Tourist attractions, amusement park concessions & rides
  • Gourmet food stores - retail (not deli)
  • Veterinary Services
  • Hardware - retail
  • Waste cleaning services
  • Household appliance repair
  • Welding repair

Simply put, for small businesses who need cash immediately and don’t qualify for a traditional loan, an MCA could be a lifesaver. Despite the controversy, here are a few reasons this lending alternative deserves a second chance:

Fast access to cash

Cash advance applications typically require less paperwork and have faster turnarounds than traditional loans. In fact, LVRG is able to transfer lump sum capital in as little as a day in some cases, which can be lifesaving for a business with an unexpected cash flow emergency.

A good option for bad credit

Merchant cash advances biggest advantage as a loan product is that it opens up a channel for business owners with bad credit to get liquid cash. Additionally, the customer’s credit score isn’t as important as their future sales projections, given that the provider is paid back through a percentage of daily credit card sales.”

Flexible return payment

With a traditional loan, the same minimum payment on principal and interest is due month to month, regardless of whether business is in a slump. This can be a big challenge for seasonal businesses that don’t have a regular cash flow. But because a merchant cash advance is repaid through a fixed percentage of daily sales, borrowers have the flexibility to repay more when sales volume is high and less during slower sales periods.

No collateral required

If an entrepreneur doesn’t have significant personal assets to leverage, traditional bank loans can be almost impossible to obtain. And even for business owners who do have significant home equity or other assets to be used for collateral, the risk that entails doesn’t always sit well. One benefit of the MCA model for borrowers is that no collateral is required, meaning if the business fails, the provider has little recourse to collect.

Our expert funding advisors are ready to learn about your business needs to determine if a Merchant Cash Advance is right for you and your business. Call us toll free at (855) 998-5874 or click below to pre-qualify!