What You Need To Know About the Business Cash Advance
If you are looking to secure funds for your business, a business cash advance (or merchant cash advance) may be the right solution for you. There are number of programs and factors to consider. However, the most important advice anyone can give is that every business owner should do as much research and due diligence as possible before committing to any loan obligation. Understanding the terms under which you will be held accountable is tantamount to having a successful loan transaction.
Specifically, if you are in the retail business, a business cash advance is a quite common business loan type. Almost all business cash advance programs are unsecured business loans. That means they are not secured by any specific asset such as equipment or real estate. They are approved based on your revenue and the total number of deposits you receive each month. You’ll need to provide merchant statements in order to get approved for a merchant cash advance. Lenders want to see regular credit card transactions, and the more your business can show the better.
What is a business cash advance?
A business cash advance comes in many forms. There’s not one program with the same features across the board. However, the basic idea is a business cash advance is a loan for your business from future revenue. You are essentially purchasing your a future sales from a bank, a lender, or some financial institution. For retailers a business cash advance is also known as a merchant cash advance.
These business loans come in many shapes and sizes. There are number of programs with varying stipulations. Depending on what you and your business get approved for, the terms and the amount of the loan can range all across the board. There’s not one solution to fit all business types and profiles. It’s important to do your research and understand your need for the funds before committing to any loan type. Never get yourself into a situation that could be harmful for your business.
How do I get a business cash advance?
Getting a business cash advance is not as difficult as you might expect. In recent years it’s actually become much easier to secure the funds you need. After the financial crisis in 2008, many direct lenders created new products since the banks were no longer lending to nearly all businesses. Since then, banks have been approving about 1 out of 10 applications. However, direct lenders approve about 8 out of 10 applications.
Typically, to start the process you will need to first fill out an application. Most applications with direct lenders are a simple one-page form asking for basic information about your business and the personal guarantee of the owner. In addition to the one-page application the lender will want to see how much revenue your business generates and if your business is profitable. The more option your business generates deposits into your bank account the easier it will be for the bank or lender to approve the loan. In the case of a merchant cash advance, retail businesses will need to provide credit card statements.
A merchant cash advance typically comes with a lower interest rate because it is less risky when the business has multiple transactions a day. For retail businesses, the number of deposits is going to be much greater than most other businesses. When a business only has a couple deposits a month it’s much more difficult to approve the loan because if one deposit does not come in for a month the business could default on the loan.
How much money can I get approved for?
The amount of money you will get for a business cash advance will depend on the amount of Revenue your business can show. Typically, merchant cash advance will approve somewhere in the range of 8 to 12% of gross annual sales. For example, if you are business does about $1 million per year and revenue, the loan amount we’ll be somewhere in the range of $80,000 to $120,000. Based on your deposit totals each month and your credit, play funding amount will fall somewhere in this range. It’s impossible for any lender to give you exact numbers on an approval amount without seeing a full application and business profile.
Most business cash advance programs will allow you to take multiple drawers over the course of the loan. This means you can take out only the funds you need at the time and the only pay interest on the money you borrow. Financial flexibility is extremely important to business owners and most lenders try to accommodate this need. Oftentimes business owners get into situations they did not foresee and will need emergency funds in those situations. A wise business person would save at least a portion of the funds just in case they are needed at a later date. Once you take out the funds, the payback structure will begin within the first week.
How long do I get to keep the money?
When you take out a business cash advance the terms of the loan will be determined by your revenue and credit score. However, most of these loans have terms ranging from 3 to 36 months. These loans are not generally for businesses who need the funds for multiple years. The use of these funds is primarily geared toward bridging the gap over a few months or a year. If you plan to use the funds over 3 years, then expect to pay the price in interest.
Additionally, there are a number of structured payback types depending on what you get approved for and makes sense for your business. The most common business cash advance payback structure involves daily payments. This means the lender will set up automatic ACH micro payments to be withdrawn are business bank account daily. Funds are not withdrawn on weekends, averaging about 22 payments per month. This tends to lessen the burden of the payback since each payment is a small portion of your monthly payback amount. A lump sum payment is much more likely to be defaulted on. This puts the lender and the business in a bad situation.
You can also find programs that will withdraw a percentage of deposits each day until the monthly pay back amount is reached. This is an older version of the business cash advance model and not something most businesses would appreciate. The issue with that model of percentage of deposits is the business owner is completely unaware of how much money will be taken from the business bank account on a given day. This can obviously cause many headaches for business owners. Therefore, is our recommendation to avoid these loan structures if possible.
Is a business cash advance only for retail?
Although retail businesses are the ideal candidate for business cash advance, it does not mean that the program can only be applied to these business types. If you are business does regular credit card transactions, this loan type may still work for your business. Any business with a high volume of deposits will be approved for a merchant cash advance.
Another common business type that might want to explore the merchant cash advance is home services. Contractors, plumbers, painters, electricians, etc., typically do high-volume credit card transactions. Especially in today’s age where businesses can accept credit card on a mobile device, this trend is certainly emerging. Prior to these technological advancements, these business types would only accept cash or check. It is only in recent years that these businesses have been able to accept credit or debit cards a pretty much any location.
What happens if I default on a business cash advance?
Defaulting on a business cash advance is something both lenders and businesses hope to avoid. However, when it comes to business these loans are the most risky because the fact of the matter is most businesses fail. It is not uncommon for a business to lose revenue and become unable to pay the bills. When a business defaults on a cash advance, there are many ways to resolve the issue.
If you are likely to default in the future and you can see it coming, the best thing to do is reach out to your lender as soon as possible. Letting them know the situation ahead of time will enable them to provide all the available options for your loan. It may be possible for the lender to allow a momentary pause in payment until you can make good. A loan modification is common, there will probably be some type of fee associated, but it is much better than just not paying the loan.
If the loan is continued to not be paid over the course of many months or even years, the lender will have no choice but to take action. The lender will decide whether to go after the business or the personal guarantee. Once that decision is made, it will be up to the courts to decide the next course of action. Once a judgment is reached it will be on your credit and you’ll be unable to get funding for your business in the future. If a personal guarantee has any assets, including a mortgage, a judge possibly might give the lender priority.
Legal action is something all parties involved would prefer to avoid. If you think you wont pay back the loan, it might not be a good idea.
Do you have to personal guarantee a business cash advance?
When you take out a business cash advance, you will most certainly need to personal guarantee the loan. Since the loan is not secured by any assets, it puts the lender in a difficult situation. Therefore, the personal guarantee provide some safety net. You will not find a merchant cash advance option or a personal guarantee is not mandatory. The lender’s only recourse will be to go after the business owner.
If you have any issue with personal guaranteeing the loan, then it is likely you have some doubts on your ability to pay back the loan. A loan might not help you out of your situation if your business is already struggling to pay bills. It’s important understand how your business is performing and how the funds will be used to increase revenue and profits.
When taking out funds for your business it’s important that you take it seriously. If you take out money that you cannot afford to pay back, it could end up destroying your business. Our recommendation is you take all precautions and do as much research as possible. Before making any decisions, make sure to run all financial information through your Chief Financial Officer. You do not have a Chief Financial Officer we suggest you get one as soon as possible.
What if I have bad credit?
Most business cash advance programs are based primarily on revenue and profits. Credit is not a major factor in your approval. Therefore, are many programs available for business owners with bad credit. It is unlikely any lender will provide funds for your business if your credit score is 500 or below. There is a threshold but most business owners can get approved with their damaged credit. However, the business will need to show consistent revenue and deposits throughout the month.
Applicants can get approved by the bank or other programs at much lower interest rate if they have good credit. Of course top-tier credit will have access to programs that business owners without good credit won’t. Obviously having good credit is an asset and will provide a higher funding amount and better terms. However, it’s important on your that there are many programs and there is probably a solution for you regardless of your credit. As long as you do not have any recent judgments or file bankruptcy within the last year then you will likely secure a business cash advance.
Does Flex Capital offer a business cash advance?
First Capital has a number of programs to choose from and our financial strategists will come up with the right solution for your business. We offer a merchant cash advance for retail businesses, and we’ll help you decide if it’s the right program for you. If you do not currently have any other working capital obligations then please start the application process today.
To apply for a small business loan you will need to have a US business bank account. Your business also need at least 3 months in business and three to six months business bank statements. If you are a startup without any revenue is highly unlikely you will get approved. However, it doesn’t hurt to start the process and see what options are available. Our goal is to help businesses grow and provide the capital they need to take on new projects. We love to see businesses grow and enjoy being an integral part of that process.