There are two main ways of repaying an MCA. Note that the total repayment amount can be higher after including administrative and underwriting fees. The lender will earn a profit of $10,000, meaning the MCA has a 50% fee. The repayment fees can be higher depending on the level of risk posed and how quickly you are willing to repay the MCA.įor instance, if you apply for a merchant cash advance of $20,000, and the lender sets the factor rate at 1.5, you are obligated to repay $30,000. Lenders set their factor rates depending on a borrower’s industry, business financial stability, credit card sales history, and years of operation. The majority of MCAs attract triple-digit APRs. However, it will reduce to 87.3% if your monthly turnover drops to $70,000, and you will start making payments of $233 daily. In the above example, the APR is at 125%. If the contract stipulates that the lender will deduct 10% from your credit card sales each month and your business generates $100,000 monthly, $10,000 will be deducted monthly or $333 daily. The total repayment amount will be $70,000. If you apply for a $50,000 merchant cash advance, and the lender sets the factor rate at 1.4, the loan will attract a $20,000 fee. Often, the repayment period ranges between three and 18 months and depends on the amount of money you generate from sales. Depending on the advance given and the length of the repayment plan, the “APR” can fall anywhere between 80% and 200%. Also, you should note that the transaction can attract a variety of fees that can further inflate the total repayment amount.īecause merchant cash advances are not typical loans, they have higher interest rates and lack a true APR (annual percentage rate). To figure out the estimated repayment amount, multiply it with the advanced money. The MCA lender will need to recover the upfront advance and a profit typically known as a “factor.” Most lenders set the factor rate at 1.1 to 1.5. Generally, MCAs are short-term loans, although the lender has the discretion of offering money that is less than, equivalent to, or greater than your monthly credit card turnover. The lender can offer the requested amount or reduce it depending on the risks presented. Also, the business owner must stipulate the required amount. The lender needs transparency into a business’s average monthly turnover before agreeing to the advance amount and the repayment plan. The cash advance is the primary subject of interest that links small business owners and MCA lenders. It is crucial to understand the three main components of a merchant cash advance for you to acquaint yourself with the strings attached to a deal. The MCA lender will provide an upfront sum of money for a percentage of your business’s credit card revenue. The fast cash advance can allow you to manage any limitations in your cash flow and streamline your operations. It’s easy to qualify for an advance even if you lack a business line of credit or valuable assets that attract deals from traditional lenders. If you are not borrowing to boost an ROI-generating project, an MCA can quickly become a toxic loan. Remember that you must make daily payments from your credit card sales, meaning the advance could throw you deeper into debt. Generally, an MCA is not ideal for reviving the operations of a struggling business. Who Should Not Consider Taking a Merchant Cash Advance?
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