Merchant Blog

Blog Article: Understanding the cost of a Merchant Cash Advance

Something that comes up when discussing our merchant financing services is “how much does this cost me?”. In today’s blog post we hope to remove the mystery and help business owners understand how this cost is calculated, and furthermore, why it is what it is and whether it is worth it. In a merchant cash advance transaction, $X is advanced up-front in return for $Y collected overtime. The $Y is collected by taking a percentage of a business’s debit/credit card sales each day. There is no “term” to the financing – it does not have a maturity date. It takes the cash advance company as long as it takes to recover $Y, which depends on the merchant’s sales volumes over the duration of the program.

The difference between X & Y is the revenue made by the cash advance company, and this difference is typically 20-40%, depending on a merchant’s risk characteristics. Using cash flow forecasts, the cash advance company estimates its collection time and usually targets 9-10 months. First, let’s tackle the perspective of the cash advance company. It is in the business of non-collateral based financing – its security in the transaction is future sales flows. It is an entirely variable payment structure and with no asset collateral so the financier is taking a lot more risk, for which they must be compensated in order to remain profitable.

The next question is, is it worth it? The answer to the question is, well, it depends! In cases where a business owner has a concrete plan and a way to use the capital to finance long-term growth then yes, it most definitely is worth it. If a business owner doesn’t have a plan or uses the money for personal reasons, then it is just an expensive form of leverage without benefit. So the critical question that you have to ask is, “can I take this $50,000 or $100,000 and make an extra $10,000 or $20,000 per year in profit because of it?”. What we have seen is that at the small business level, whether it is a timely acquisition of inventory or of a competing business, or the purchase of critical equipment for expansion, this cost is easily justified. The alternative is to sell a piece of your business to an investor, and that is much more expensive. If an investor buys into a business for $50,000 or $100,000, he has a claim on your profits forever. On the flipside, Merchant Advance Capital is in the deal with you for a short 9-10 months or so and then you go back to business as usual free of any claims.

So what would you do with an extra $50,000 – $100,000 this summer season? If you have some ideas, please give us a call and we will help you out!

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