Once the merchant cash advance programs are produced the merchant and the lender will decide on a course that best fits the merchant’s business model. Many times merchants ask “What is the interest on this program?” They must remember that while merchant cash advances are generally a more “expensive” method of business financing than traditional bank loans, they are very different from interest programs because there is no interest incurred on the funding.
There is a fixed factor payment for the amount of money advanced. This factor can usually range between 1.20 to 1.65 on the funded amount depending on the individual merchant and the lender. For example, a merchant taking out a $25,000 advance can expect to pay back anywhere from $30,000 to $41,250.
Generally lenders are interested in short-term lending as this is less risky than long term lending, and most plans will be tailored between five to nine months. The shorter merchant cash advance programs will have higher hold back percentages (the percentage taken from the merchant’s credit card receivables) but the factor (cost of the money) will be lower. This could be the right answer for a merchant who simply wants to pay off the advance quickly, and has the right amount of cash flow so that a high hold back percentage will not affect the business negatively.
A longer merchant cash advance program will mean that the factor will be higher (more costly money), but the holdback percentage will be lower. This might fit for a business owner who is interested in paying back the lender slower and willing to pay more for the money while having less from his credit card receivables taken when he batches out.
Contracts are drawn up at this point, and additional information is requested from the merchant. This usually includes a business license or tax return showing the legal ownership of the business, month to date processing, a lease agreement or mortgage statement, additional trade references, a voided check, a driver’s license, a yearly profit and loss sheet (may not be needed for smaller advances) and a franchise agreement and contact if applicable. There may also be a clause or a page in the merchant cash advance contracts that are additional fees attached onto the agreement. These usually range between 2.5% – 5.0% of the funded amount and are to cover the cost of underwriting the file, splitting the processing, and finding the funding for the merchant.
To read about processing click here!