Merchant Cash Advance Rates: What You Should Know
Owners of small businesses often find themselves in a position whereby they need instant access to money to either expand or protect their business operations. Enter the industry of Merchant Cash Advancement, which has seen a steady growth over the past ten years. It is easy to come by and guarantees a quick pay-out – sometimes within as little as 24 hours.
The Difference Between an Interest Rate and an APR
Business owners often incorrectly believe they will pay a fixed interest rate on a merchant cash advancement. It is therefore beneficial to understand the difference between an APR and a regular interest rate.
An interest rate is the rate applicable in the calculation of a monthly loan repayment. This repayment is determined by means of three factors: The amount borrowed, the set repayment term and the fixed interest rate. Annual Percentage Rate or APR, is the exact interest applicable in terms of the cash advance amount and therefore the total amount which will be repayable on a monthly basis.
A merchant cash advance does not pose an interest rate as it is not considered to be a loan. The merchant making the cash advance available generally collects a percentage of a business’ credit sales, often referred to as a premium. For example: A merchant cash advance company may propose a monthly premium of 30 cents for each dollar generated from a company’s credit sales until such time the cash advancement has been repaid in full. When compared to an interest rate, the repayable amount in terms of merchant cash advance rates is surely higher, but it could ultimately be a small price to pay for possibly keeping a business afloat.
When a loan is secured from a bank, the repayment term is determined over a set period of time e.g. 48 months. This is not the case with merchant cash advancements. Due to the fact that a company may experience monthly fluctuations in credit sales, there is no set repayment period linked to a cash advance. However, the general rule of thumb is a repayment period between four and eighteen months, with most cash advances typically repaid within a period of 12 months.
The Pros and Cons of Merchant Cash Advances
Business owners find merchant cash advances to be a viable option, as its most common advantage is the fact that repayments are calculated at a lower premium during months where credit sales have been slow. A small business owner is also not required to present collateral before a cash advancement is granted, and the merchant cash advancement company will carry the burden in the event of potential losses.
One inevitable negative aspect linked to merchant cash advancements is the additional rate at which repayments are calculated. A cash advancement merchant may charge a markup rate from anywhere between 20% and 80%, but in most cases business owners are in dire need of such cash advancement and therefore see no other alternative than to apply for a cash advance.
After all, when times are tough even the topmost merchant cash advance rates could be more suitable than not being able to secure a loan at all.