A business cash advance works in a straightforward manner; the lender or service provider provides you with an upfront sum of money in advance and he does this in exchange for equity or part of your future sales. The repayment of advances are made via your bank account debits and these repayments are usually a fixed amount, plus a small fee until the full repayment has been completed.
How is the Cash Advance Funding Calculated?
It Is the duty of the cash advance provider to determine how much they want to advance your business by reviewing the past sales records. The cash advance service provider will also review your past credit card transactions and may also analyse your bank statements.
Most cash advance providers will fund between 80% to 150% of the average monthly sales generated by your company. The amount of cash advance provided will depend mostly on the financial strength of your business, based on the review of bank statements, credit card transactions, and past sales records.
The Importance of Credit Card Sales and Commercial Sales in Business Cash Advance
Taking a business cash advance can help you fund your future business sales and expansion. Your credit card transactions are some of the most commonly-funded types of business sales simply because the repayment of such credit card advance can be repaid more easily according to the perspective of most cash advance providers.
Companies or individuals can also finance future cash sales also referred to as commercial sales. The repayment period for commercial sales is different and according to most loan providers, repayment of cash advance for commercial sales are not as easy as credit card sales.
How is the Business Cash Advance Repaid?
The repayment method or mode in cash advance is quite similar to that of term loan. You will simply get the funds upfront and then make regular payments until you pay off the outstanding balance. The cash advances that are based on credit card sales are normally repaid by sharing part of your future sales or revenue with the individual or company that provided the cash advance.
The percentage rate of the revenue generated from sales after taking the cash advance is referred to as the “retrieval rate” and this could normally range from between 8% to 13% of your sales and revenue. The advances on the commercial or regular sales are normally repaid through your bank account debits. In his case, the cash advance company will debit a fixed amount from your bank account every business day until the entire loan is paid off.
In most cases, you have to take a legal undertaken that you will accept the penalties and fees of defaulting in repayment of this loan. In some cases, your business may be sold off to the cash advance provider if you are unable to repay the loan, and if you are lucky the service provider may only take over a substantial part of the business. You may need to consult an attorney before you enter into an agreement to take a business cash advance to understand the implication of what you are getting into.
What are the Advantages and Disadvantages of a Business Cash Advance?
Just like any other financial product available today, Business Cash Advance comes with its pros and cons. One of the main advantages of the cash advance is that it can be used in resolving temporary problems. For instance, if clients are not paying for products and services on time, you can take this loan to pay your suppliers or your workers. Many business owners may also consider the unstructured short term cash advance as a disadvantage because they see it as a means of resolving the wrong problem. For instance, business owners who have recurring or ongoing cash problems will not get long-term benefits from taking a short-term loan like a business cash advance.
One disadvantage that can be associated with a cash advance is that it can be expensive in the long run. Unless you have a high profit yielding business cash advances may wipe out small profit margins temporarily. The biggest disadvantage or risk for a cash advance is that you will be selling future sales, but when such future sales don’t happen, you will be enmeshed in serious cash advance debt.
One of the major advantages of the cash advance for business is that it is easier to obtain when compared to bank loans. Most accounts of business owners who apply for cash advance for business will be approved within a few hours or business days and also funded.
This is quite a different case with bank loans and similar products where the cash advance provider has to look into numerous paper works and processing of the loan can take several weeks or months. The quick turnaround in cash advances for business makes it the ideal solution for businesses that need to meet some urgent needs. A business cash advance is also ideal if your business has a high profit yielding potentials, which means you can repay the cash advance within a short period of time.
Repayment of business cash advance normally begins immediately, in which the cash advance provider will either take a portion of the ongoing sales or simply debits your bank account every other business day. This structure makes the cash advance similar to the short term loan than a line of credit. Most cash advance providers believe that the package itself is not a loan but the likely sale of the business assets in the future.
It is important to get some advice from a business loan professional and you need to shop around for different business cash advance providers for the best rates, before making a final choice. Financial advisors will be able to evaluate whether your preferred cash advance option matches your short and long term business needs. If taken once in a while, a business cash advance can be the best short term loan to resolve vital but temporary business issues.