Business Loan Option Blog

It can be a hard thing to wrap your head around, but technically a merchant cash advance is not a loan. In financial terms, a loan, whether personal or business, is a financial vehicle that creates debt and provides capital based on an agreement of repayment for an agreed upon interest rate and term. If you go to a bank and ask for a loan, you may also have to put up collateral, some asset that you agree to forfeit, to secure the loan and get them to give you some cash now, in exchange for repayment later. The only similarity between this model and a merchant cash advance is that you are getting money and agreeing to pay it back, but not through the creation of debt, rather through the sales of a business asset, namely your future credit card receivables.

No Interest Rates?

Even so, you are agreeing to pay back the money, in most cases, at a set total repayment cost that has nothing to do with assigning a fixed or variable interest rate. Interest rates are associated with loans and since technically, a merchant cash advance is not a loan, there is no interest rate assigned. You still are responsible for paying back the total repayment cost, which will be more than the actual value of the advance you receive, but the mechanism is based on a value of the advance versus repayment. If your total repayment cost on $10,000 is $11,500 after the six months, then you are said to be repaying 1.15 times the value of the loan as your total repayment cost. This is a great way to avoid incurring debt through interest rates that can change to higher levels and make it difficult to pay back.

Repayment Is Automatic

A traditional loan often sets up a payment plan where you send in monthly payments until the loan reaches maturity and you’re done with the loan. Merchant cash advances don’t have any set fixed regular payments that you need to make in order to pay back the advance. Since the agreement is to use a percentage of your future credit card receivables, there’s no way to have a fixed amount “deducted” and depends totally on your sales. Performance of your business is paramount to determine how long it might take for the provider to recoup the cash advance from your future business.

A merchant cash advance is a little more complicated than a personal cash advance. That is to be expected when dealing with sums that are in the thousands versus just hundreds. One of the things that can be really confusing for some business owners is the fact that they might have to change out their existing credit card machines for new ones to take advantage of a merchant cash advance. It can add some unexpected costs to the loan, but in the end, it will give them a new way to get lines of credit in non-traditional ways. The additional equipment is necessary to be able to repay the loan in the terms set in the loan agreement. At any rate, cash advances are easier to access and quicker to approve than traditional sources of credit and can be worth the added equipment investment to take advantage of this alternative source of credit in a pinch.
Why Might You Need New Machines?

Not all credit card machines go back to providers who will allow the split funding relationship necessary to implement a merchant cash advance repayment scheme. When you agree to take out an advance with a lender, they give you the amount you desire on the promise that you will repay it from future credit card receivables at a percentage that you both agree upon. That means that when someone shows up at your business and you swipe their card into your credit card machines, the provider of the service has to be able to send a portion of that payment to the cash advance lender to fulfill your loan terms. This split funding relationship ensures that you get some of the money in the transaction, and the percentage that you’ve agreed to give to the lender, typically between 15 and 25% of each credit card transaction, goes back to them.

Costs To Replace Your Machines

Each credit card terminal can cost $100 for simple types of machines. More advanced types cost between $250 to $300 per machine. This expense comes out of the business owners pockets and has to be included in their assessment of the loan expense before anything is formalized. You can check with the cash advance lender to find out if it will be necessary to replace your machines, if you are looking into merchant cash advances for future forms of alternative lending.

Leasing Versus Buying

The other option is to lease new terminals, if your old ones won’t work. This can be a short-term solution, but may end up costing more than simply buying a new terminal. Leasing rates go from $35 to $150, depending on the type of terminal chosen. If your term is six months or more, it makes more sense to buy new terminals, rather than leasing them for that duration. If your loan term is very short, like three months, it may make some sense to lease the machines and return to the old ones when your loan has been repaid, depending on the type of machines you need.