Many clients call AFS all the time when shopping for the best rates for a merchant cash advance. Most of the time the first question is, "What is your best factor rate?" While this is one important part of the quote, you cannot compare it without the second part of the equation which is the withholding rate.
At AFS we've written contracts from a factor rate of 1.1 (providing $10,000 in funding for $11,000 of future credit card receivables) all the way up to a 1.5 (providing $10,000 in funding for $15,000 of future credit card receivables). They key element is how fast do you expect the MCA provider to be collect the amount of the contract.
For example, a merchant that does $20,000 per month on credit cards consistently. Might get a quote for $20,000 in funding with factor rates of 1.3 and 1.4 from two different companies. If they both have the same withholding rate of 30% of credit cards then its easy to identify which is the best deal.
If the 1.3 factor rate has a withholding of 25%, we would expect the MCA provider to collect the $26,000 over 5.2 months. Now if the 1.4 factor rate quote has a withholding of 20%, the MCA provider will collect over 7.0 months. As a business owner the merchant will need to ask him or herself two important questions:
1. Is the higher factor rate worth the longer payback period?
2. Can my cash flow afford the withholding percentage?
Often we have clients that want a factor rate of less than 1.2 and generally MCA providers have no problems with providing a low factor rate. In fact, MCA providers generally prefer lower factor rates, because they collect on those contracts over a shorter time frame, thus lowering their risk on funding the contract. However, most reputable MCA providers also recognize that they can quickly put a merchant out of business if they withhold too much of business' credit card sales. Most MCA providers limit the amount that they expect to collect from a merchant to 11 to nine percent of the business total gross sales.
When comparing quotes remember the old time/value of money rule. The longer you have the funds, the more it is going to cost due to greater risk of default. Don't forget to deal with only reputable companies that have a proven track record and will around for the long haul to support your business for years to come. Most MCA providers offer discounts on subsequent contracts since the merchant has demonstrated a proven track record in paying back a contract.
April 19, 2009
April 5, 2009
How To Shop For A Merchant Cash Advance
Merchant cash advances are a great option for financing when a business cannot get a traditional business loan or does not have the time to wait for a loan to close. Unfortunately there are a few providers that charge additional fees, dramatically increasing the cost of the financing or have restrictions that do not fit a particular business.
When seeking a merchant cash advance make sure you find the right financing institution to fit your business' needs.
- Make it a priority to seek a merchant cash advance that requires no closing costs.
- Avoid initial, up-front fees including application fees, credit report fees and any other fees. Negotiate or seek a merchant cash advance provider that can wave initial fees.
- You may be asked to provide collateral to obtain a merchant cash advance. If your merchant cash provider requires it then the rate should be dramatically lower because it is now secured financing.
- Some merchant cash advance providers require that the business provide financial statements. Most require them for larger funding amount ($50,000 or more)
- Avoid any minimum payment requirements in the MCA contract. Some contracts require that a minimum amount be collected. The beauty of the MCA is that payback is tied directly to the business' cash flow. So, when the business is doing well, it pays back faster and just the opposite when its slower.
- Find the right collection method for your business. Most MCA providers have the business change their processing over to a credit card processing company that splits the credit card batches. If you can't change credit card processors, some may offer a trust account (also known as a lock box) collection method, where all credit card proceeds are deposited into a separate checking account then the business receives its proceeds via ACH. Some MCA providers may also offer a fixed payment collection where they collect a set amount based on the average credit card sales a business does. For example a business does $100,000 a month in credit card processing and enters into a contract where 10% of the credit card sales are collected, the MCA provider may collect $2,500 per week via ACH to equal 10% of the $100,000 it would have collected by splitting the credit card batches.
- Some MCA providers require that you've been in business for at least 24 months. If that's not the case, you'll have seek a company that have a lower requirement. Generally the minimum amount is 12 months, unless you're operating a well known franchise, then the minimum is around six months.
- Know your credit score before you start shopping around. If your business has a lower score, look for providers that fund contracts in your score range. Generally the minimum acceptable score is 550, but some have minimums of 650 or even higher.
- Most important is to find a MCA provider that has been around for at least two years and is financially sound. Many small MCA providers come and go due to lack of capitalization. You want to make sure you find one that will be a true partner in your business. Most business owner renew there cash advances even before the first contract is paid in full. It should be a relatively painless process to get additional funding in 48 to 72 hours the second time around when your balance is paid down (generally the business has to have paid 70% of the balance before being eligible for more funding.)
- Last thing is to research the financing company by checking their Better Business Bureau rating, see if they have a finance lenders license (this is not required, but its nice to know if they are being regulated) and check out discussion boards to see other clients reviews.
American Finance Solutions does not charge any type of fees in association with its contracts, does not require security in any collateral, offers all three collection methods, requires business be operating for 12 months usually (six months for a franchise), minimum FICO score requirement of 550 and has been in operation for three years and is a licensed California lender.
When seeking a merchant cash advance make sure you find the right financing institution to fit your business' needs.
- Make it a priority to seek a merchant cash advance that requires no closing costs.
- Avoid initial, up-front fees including application fees, credit report fees and any other fees. Negotiate or seek a merchant cash advance provider that can wave initial fees.
- You may be asked to provide collateral to obtain a merchant cash advance. If your merchant cash provider requires it then the rate should be dramatically lower because it is now secured financing.
- Some merchant cash advance providers require that the business provide financial statements. Most require them for larger funding amount ($50,000 or more)
- Avoid any minimum payment requirements in the MCA contract. Some contracts require that a minimum amount be collected. The beauty of the MCA is that payback is tied directly to the business' cash flow. So, when the business is doing well, it pays back faster and just the opposite when its slower.
- Find the right collection method for your business. Most MCA providers have the business change their processing over to a credit card processing company that splits the credit card batches. If you can't change credit card processors, some may offer a trust account (also known as a lock box) collection method, where all credit card proceeds are deposited into a separate checking account then the business receives its proceeds via ACH. Some MCA providers may also offer a fixed payment collection where they collect a set amount based on the average credit card sales a business does. For example a business does $100,000 a month in credit card processing and enters into a contract where 10% of the credit card sales are collected, the MCA provider may collect $2,500 per week via ACH to equal 10% of the $100,000 it would have collected by splitting the credit card batches.
- Some MCA providers require that you've been in business for at least 24 months. If that's not the case, you'll have seek a company that have a lower requirement. Generally the minimum amount is 12 months, unless you're operating a well known franchise, then the minimum is around six months.
- Know your credit score before you start shopping around. If your business has a lower score, look for providers that fund contracts in your score range. Generally the minimum acceptable score is 550, but some have minimums of 650 or even higher.
- Most important is to find a MCA provider that has been around for at least two years and is financially sound. Many small MCA providers come and go due to lack of capitalization. You want to make sure you find one that will be a true partner in your business. Most business owner renew there cash advances even before the first contract is paid in full. It should be a relatively painless process to get additional funding in 48 to 72 hours the second time around when your balance is paid down (generally the business has to have paid 70% of the balance before being eligible for more funding.)
- Last thing is to research the financing company by checking their Better Business Bureau rating, see if they have a finance lenders license (this is not required, but its nice to know if they are being regulated) and check out discussion boards to see other clients reviews.
American Finance Solutions does not charge any type of fees in association with its contracts, does not require security in any collateral, offers all three collection methods, requires business be operating for 12 months usually (six months for a franchise), minimum FICO score requirement of 550 and has been in operation for three years and is a licensed California lender.
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