You may have heard the latest buzz doing the rounds, a financing tool, known as merchant cash advance, or among other titles, credit card factoring. What is it and how does it compare to invoice factoring?
Similar to accounts receivable financing, a merchant cash advance is not a loan, rather a cash advance, as the title would suggest. Unlike invoice factoring, money is not advanced as a result of invoices issued to customers; it is money advanced on future credit card receipts. Sales are projected and have not yet taken place.
While not a new concept, merchant cash advances have become a popular option for small business owners needing fast access to capital. The premiums for this service can be high – sometimes 30% or more on the money advanced – but there are plenty of businesses prepared to pay the price.
How it works:
- Cash advance providers offer a lump sum payment, at a set interest rate, for a share of future sales
- Providers collect a percentage amount from a company’s daily credit card sales
- This process is repeated until the lump sum plus agreed interest is covered
- No fixed payment amounts and no fixed schedule
- The amount paid per month varies with cash flow so less is paid in slower months
This seems like an excellent solution when a business cannot qualify for a loan but desperately needs working capital. It certainly can work successfully for businesses that are sure of their credit card sales. Most small businesses would agree that it is not an ideal solution but can get them through a tough period where a traditional bank loan is not an option because of bad or no credit, and little collateral to offer as a guarantee.
Invoice factoring and merchant cash advances are both business loan alternatives, supplying immediate access to cash against generated sales or projected sales. So why consider accounts receivable financing over a merchant cash advance?
- Factors advance money on guaranteed, invoiced, delivered sales
- No gambling with the possibility that the sales simply will not happen
- Rates are considerably lower – up to 27% less!
Consider the following simplified scenario:
- $20,000.00 of invoices for delivered goods or services submitted to the invoice factoring company
- Agreed factoring rate 2% (rates can be as low as .5%)
- The cost for the advance cash on invoices is $400 as well as a fee to factor
Merchant Cash Advance
- Predicted future sales to be funded $20,000.00
- Agreed cash advance rate 20%
- The minimum cost for the cash advance $4,000.00
Obviously there are pros and cons to each method, depending upon your situation. Merchant funding can be extremely useful for those companies in the restaurant or retail market, who depend almost exclusively upon credit card transactions. However, if your business model were such that you invoice your customers, accounts receivable financing would certainly be a more cost effective choice in the long run.
At Bay View Funding each member of our dedicated team promises to genuinely, and personally provide you with the best factoring solution to meet the unique and specific needs for your company. We are committed to a 100% satisfaction guarantee.