What Is A Merchant Cash Advance?

Companies across the nation are having a harder time getting approved for loans than ever before. With banks regularly turning down reputable companies, being able to find way to fund your company’s needs has never been more crucial. The newest way to obtain funding is called a merchant cash advance.

Leo Capital Group is proud to say that our cash advances gained a reputation for excellence in the business community. They offered restaurants, bars, retailers, and other businesses the ability to stay afloat and even expand during tough times.

It’s important to understand the terms of any business agreement before you sign on the dotted line. To help educate our clients, we decided to offer this guide explaining what a cash advance is and how it works.

WHAT IS A MERCHANT CASH ADVANCE?

Before we begin, it’s important to emphasize that a cash advance is not a loan. A merchant cash advance is a purchase of your future sales at a discount. This seemingly minor difference makes a huge impact on how cash advances work.

Cash advances offer much higher approval rates, flexible payment plans, and higher levels of freedom for business owners. Since it’s a purchase rather than a loan, advances can also reach disbursement within a matter of days.

WHY ARE MERCHANT CASH ADVANCES POPULAR?

The rapid growth of cash advance use is not a coincidence. There are many benefits to choosing a cash advance over a standard loan, including the following:

Higher Approval Rates. Most people who apply for a bank loan will not get one due to a bad credit rating or limited time in business. Cash advances have approval ratings of over 70 percent, making it a great option for people who’ve already been denied a loan.
No Collateral Necessary. Since merchant cash advances aren’t actually loans, lenders cannot require you to offer collateral in order to receive funding. This means you have a lower risk of serious loss should your business fail.
Flexible Monthly Payments. Fixed monthly payments sound great, but they can put pressure on companies that deal with noticeable cash flow surges. Since cash advance payments are based on how much you make per week (or per day), every payment you make will be proportional to your profits. If you don’t make any money one week, you don’t pay anything that week.
Less Paperwork. Paperwork is what makes most traditional business loans so difficult to obtain. Along with running a credit check, lenders often require large amounts of documentation proving your ability to pay things back. Cash advances, on the other hand, require minimal paperwork and proof since it’s a purchase.
Faster Access To Cash. Cash advances move from application to disbursement within days, compared to a typical bank loan that can take weeks or even months to clear.

WHAT DO I NEED TO APPLY FOR A MERCHANT CASH ADVANCE?

Merchant cash advances do not require credit check, business history documentation, or tax documents for approval. Since cash advances involve buying future sales, the only real documentation you need is proof that your business has sales. Most cash advances will require records of credit card purchases.

Generally speaking, most business owners who have a positive cash flow and have been in business for at least three months will be able to get approved.

ARE MERCHANT CASH ADVANCES HIGH INTEREST?

Cash advances don’t operate by the same laws that loans do, and therefore don’t have interest rates. They do, however, have factor rates. A factor rate acts like an interest rate. The only difference is that you calculate the total amount that you pay by multiplying the “loan” amount by the factor.

For example, if you had a merchant cash advance of $1,000 with a factor of 1.1, you would owe a total of $1,100. If you had a cash advance of $100 with a factor of 1.02, you would have to pay a total of $102.

Because cash advances are rated on a total amount paid, you never have to worry about compounding interest. It’s a full fee that you get to pay off at your own pace.

HOW MUCH FUNDING CAN I GET?

The amount of funding that you can get all depends on how much money your business is currently taking in, plus a couple of other factors. To learn more, it’s best to talk to a specialist at Leo Capital Group about your financial needs.