Small Business Strategy: Borrowing from Future Credit Card Sales
How a Merchant Cash Advance Can Give Your Businesses Flexibility
Merchant cash advances have been around for over a decade, yet a lot of small business owners are still often unaware of how this specific lending product can help grow their business. Compared to a traditional business loan, a Merchant Cash Advance allows the business to use their future sales to get immediate access to capital.
How does financing against future credit card sales work?
The first step lenders will take is to develop a deep understanding of the applying business and their cash flow. Specifically, they look for certain data points that allow them to forecast future sales. Based on these numbers, they can come up with an amount they believe the business can not only afford to repay, but one that will benefit them the most.
To get an idea of what your business might qualify for, calculate your average credit and debit card sales. If you process around $100,000 monthly, chances are you’d qualify for around $100,000 in funding.
As opposed to a business loan, repayment on cash advances is variable and is calculated daily based on card sales. Let’s use $100,000 at a rate of 10% (also known as a 1.1 factor rate) as an example.
- Advanced amount - $100,000
- Payback amount - $110,000
- Retrieval rate – 10%
This means 10% of daily credit and debit sales would be collected until the $110,000 is repaid. Because payments fluctuate daily, the repayment length varies from advance to advance.
- Credit and debit card sales on a given day - $250
- Amount collected on that day - $25
- Credit and debit card sales on a given day - $0
- Amount collected on that day - $0
Who is a Merchant Cash Advance for?
Many types of small businesses are great fits for the Merchant Cash Advance program. This is especially true for businesses that go through busy as well as slow sales periods. Because of the repayment structure of the product, it makes managing cash flow easier during slowdowns.
At Evolocity, we have 5 main requirements for applicants, they are:
- You have a Canadian-based business
- You have an active commercial lease
- You accept debit and credit cards
- You have average monthly sales of $15,000
- You have been in business for at least 6 months
It’s important to note that a Merchant Cash Advance is one of the easier financing options to get approved for. But, because the lenders assume more risk, it is often also a more expensive option compared to a typical business loan.
What are the advantages of Merchant Cash Advances?
Aside from the flexibility of the repayment process, there are a few other main reasons business owners choose a merchant cash advance.
- The application process is fast and easy
- Funds can be in your account in as little as 48 hours after approval
- The funds can be used for any business purpose
- You can access your account with up to the minute repayment information 24/7 online
Merchant Cash Advances from Evolocity
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