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You are having a few financial difficulties with your small business, and you are concerned that you may not be able to pay your employees next month. You have heard of the “merchant cash advance,” and you think it might be the answer to your problems. Before you look into this option, there are a few things you should know about merchant cash advances first.

How the Merchant Cash Advance Works

Merchant cash advance lenders present you with a sum of money up front. The monthly amount you will owe will be based on your future credit and debit card sales and the fees. You can also agree to pay a daily or weekly sum of money with a fee until the money has been re-paid in full.

With the second option, daily or weekly withdrawals will be paid to the lender with Automated Clearing House or ACH debits. This allows companies with customers who do not pay primarily with debit and credit cards to take advantage of the merchant cash advance. It is the most popular of the two re-payment types.

The Fees

Fees will be based on your ability to re-pay the lender. Like with a bank, the lender will determine how creditworthy you are. The least creditworthy people are given a factor rate of “1.5.” This is the highest rate, and it means that you will pay the highest fees.

We can calculate an example now. Suppose that the merchant gave you a factor rate of 1.4. The merchant approves you for an advance of $50,000. By multiplying the factor rate by the advance amount, you arrive at $70,000. You will be paying $50,000 plus the $20,000 in fees that the merchant charges on this advance.

Under this arrangement, your monthly payment would be $2,331. This amount is based on monthly credit and debit sales receipts, and these can fluctuate. If your sales go down, for example, you will owe the same amount that you owe when your sales are up. In contrast, the second option’s re-payment plan is not tied to your sales receipts. Therefore, the payment remains the same throughout the re-payment period.

Re-Payment with Credit and Debit Receipts

If you decide to re-pay the advance with debit and credit card receipts, the re-payment period will be between three and twelve months. Suppose you own a restaurant that takes in $100,000 per month. The lender may set your re-payment rate at 10 percent. This means that you would be required to pay the lender $10,000 per month.

Daily Re-Payment

In our example, your daily credit sales would require you to pay $333 a day for 30 days. It would take you seven months to pay the cash advance in full at this rate. This would be true if your revenue remained the same throughout the entire seven months. Your revenue could also go down to $70,000 per month. In that case, your payments would also go down to $233 per month, and you wouldn’t pay the advance in full until the 10th month.

Disadvantages of Merchant Cash Advances

Merchant cash advances tend to be more expensive than traditional and other types of loans. For example, a loan from a traditional source would have an interest rate of 10 percent or less. If you were to seek a loan from an online lender, you would be charged between seven percent and 108 percent. Lastly, the annual percentage rate for a business credit card would be between 12.9 percent and 29.9 percent. The annual percentage rate for a merchant cash advance would be 40 percent to 350 percent.

The Advantages

The merchant cash advance can also be a very positive asset. For example, you will not be risking your home with a merchant cash advance. These advances do not require you to offer anything as collateral, so if you can’t make a payment, you will not have to forfeit any property. Another positive is the fact that you can obtain the money you need in about one week.

If you decide against a merchant cash advance, an online lender might be able to help you. These lenders are offering competitive interest rates, and they do not necessarily require you to have the highest credit scores. There is an answer out there for you.