Small businesses owe a lot to alternative lenders since they are flexible and willing to experiment with a variety of financing options. Over the years, they have come up with many innovative products that have seen SMBs from various sectors secure working capital to fund their short-term operational needs. One of those innovative products is the business cash advance.
32 percent of small-scale business owners think now is the opportune time to expand their operations, but these plans are stifled by the high rates at which big banks are rejecting business loan applications. Products like the business cash advance are relevant now more than ever, and the savvy business owner needs to know what it is and how it works.
What is a Business Cash Advance and How Does it Work
A business cash advance, most commonly known as a merchant cash advance, provides small businesses with access to capital in exchange for a percentage of their daily credit and debit card sales. That is why it is suitable for companies where a majority of its cash flow comes from PDQ machines.
Business cash advances are preferred by a wide range of small-scale businesses for the following reasons:
- Quick working capital
- No stringent eligibility criteria
- The application can be completed within minutes
- Funds are available in as little as 48 hours
- No fixed repayment terms
To determine the amount the financing company will advance you, they review your past credit and debit cards sales. And the amount repayable is calculated using a factor rate. Then, you and the lender will agree on a collection rate, which is a multiplier used to come up with the amount deductible from the total card transactions that happen through your PDQ machines.
For example, James is the owner of a restaurant, and his suppliers have increased their prices to the point James is unable to procure more inventory. He instinctively turns to the banks to help him meet the increased cost of doing business. But in seeing that James is a high-risk client due to his monthly turnover not meeting the minimum requirement, the bank is unable to extend him any line of credit. James opts to get a business cash advance from an alternative lender amounting to £50,000.
James agrees to a factor rate 1.2%, meaning the total he has to pay back is £60,000 (£50,000 principle x 1.2%), and a collection rate of 12%. This means that if James averages credit card sales of £800, 10%, which is £80, of that will go to the lender until the cash advance is paid in full (£60,000).
The business cash advance is an innovative financial product that is helping small-scale businesses secure funding in novel ways. With business owners wanting to take their operations to the next level, cash advances are believed to be vital in helping them realise their growth-oriented objectives. Want to know more about the merchant cash advance? Visit Merchant Money for more info on cash advance lending solutions.