Boost Your Business With a Cash Advance

Get a short-term cash injection for your small business

What Is a Cash Advance?

A cash advance is not a loan but rather a commercial transaction where a cash advance provider purchases a set amount of your business’ future sales — typically credit or debit card transactions, as well as sales from checks or deposit transfers. A cash advance is different from a business credit card or line of credit issued by a traditional lender.

Because some lenders have rigorous business loan eligibility parameters, many small businesses have turned to cash advances for their quick capital needs. Although it is easy to qualify for such arrangements, cash advances can exacerbate debt if they are not carefully managed. Cash advances commonly come in two categories.

Checks and Deposit Transfers

Cash advances can be given for the purchase of future sales from non-credit or debit card sources — in other words, checks or deposit transfers.

Merchant Cash Advance

Merchant Cash Advance (MCA) describes receivables financing from credit and debit card sales.

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Advance Amount

50% to 90% of total outstanding invoices

Advance Term

Daily or weekly payments

Time to Fund

1 to 7 days

Getting a Cash Advance in 5 Steps

1. Application

The business files an application with a cash advance provider. Compared to applying for a traditional business loan, cash advances require much less documentation, but the business needs to provide a history of daily credit card or payment receipts.

2. Review

The cash advance provider assesses the payment history and determines the risk level of your business, expressed as a factor rate. The higher the factor rate, the more expensive the fees and interest rates for the advance.

3. Agreement

One of the following repayment processes will be agreed upon:

  • Holdback percentage.  A holdback percentage is deducted by the credit card processor from future credit and debit card sales and distributed to the cash advance provider until the advance is paid back in full, plus fees.
  • Automated clearing house (ACH) payments.  Fixed daily or weekly payments directly deducted from the business’s merchant bank account until the advance is paid back in full, plus fees.
  • Trust account. Also known as a lock box, an account is established with a third party that receives all of the business’ sales revenue and distributes the money back to the business and cash advance provider accordingly until the advance is paid back in full, plus fees.

4. Transfer

The cash advance provider transfers the advance amount to the business’ merchant bank account.

5. Payment

Payments to the cash advance provider begin, often as quickly as the day following the cash advance distribution.

Cash Advance Providers

  • Not a bank or lender
  • Not held to federal or state banking regulations
  • Not required to calculate APR on cash advances
  • Cash advances are not tax deductible

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Understanding Rates of Cash Advances

It can be hard to compare factor rates to APRs, but it is an essential step to understanding the true cost of a cash advance, which is often much higher than a traditional loan.

An example:

  • The cash advance provider extends a $25,000 advance amount at a 1.4 factor rate. Your total repayment amount is $35,000 (25,000 x 1.4).
  • The cash advance provider dictates a 15 percent holdback percentage. Your business projects $15,000 in monthly credit card sales.
  • Assuming a zero percent origination fee, the APR for this cash advance is 55.86 percent.

Cash Advance: Terms to Know

Purchase Price or Advance Amount

The amount of cash the business is receiving as an advance.

Specified Percentage or Holdback Percentage

The percentage of daily credit card or other revenue that is withheld from the business and paid to the cash advance provider.

Receipts Purchased Amount or Repayment Amount

The total amount the business will repay to the cash advance provider.

Factor Rate

Cash advances are calculated for total fixed costs and interest rates are not explicitly noted. Instead, a factor rate is determined by the provider based on the risk level it perceives from the business.

Can I Get a Business Cash Advance?

It is generally easy for businesses to get approved for a cash advance. Eligibility is primarily based on credit card and sales receipts that typically demonstrate a minimum of at least three months of steady income. Minimum credit score, revenue and time in business requirements often apply, but are lenient.

For a business with no assets to place as collateral or one that is poorly capitalized and ineligible for a traditional business loan or line, a cash advance is one way to get an urgent capital injection. If your business has available collateral, good credit and liquidity, business loans or lines of credit may be more suitable for your financial needs.

Cash Advance With Bad Credit

Companies with credit as low as 400 are eligible for a cash advance if they can demonstrate adequate, consistent income. Some cash advance providers extend financing to companies with a prior bankruptcy or history of non-sufficient funds, or overdrafts. Compare your options.

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Common Risks and Factors to Consider

The biggest risk in taking a cash advance for your business is in compounding debt. Many businesses opt for a cash advance after being deemed ineligible for any other business loan, putting them in a worse position to make repayment obligations from the start.

Small businesses could find themselves taking out additional advances to cover payments, pushing them further into the red. Remember that although cash advances are convenient in times of immediate financial need, they are also extremely costly. Compare cash advance factor rates and calculate the APR to identify if it makes sense for your business.

Pros
  •  Quick to fund, typically within seven days
  •  Minimum credit score of as low as 400
  •  Holdback percentage repayment can be a flexible option for retail and merchant businesses whose income depends on credit and debit sales
  •  Unsecured. Cash advances can be considered “secured” against the purchase of future sales revenue, but no collateral is required
  •  No restrictions on how money is spent
Cons
  •  Interest rates are often extremely high, and multiple fees apply
  •  Daily or weekly repayment schedules can strain cash flow
  •  No early repayment benefits
  •  Holdback percentage repayment may require the business to switch credit card processors to the cash advance provider’s preference, costing time and money
  •  It’s a commercial transaction and not a traditional loan, so the business is not building credit by paying back the advance

No Need for Speed

The benefit of a holdback percentage on a cash advance is that if sales unexpectedly increase, the business may pay off the advance sooner. Conversely, if sales slow, the percentage will adjust lower accordingly.

The speed of repayment affects the interest rate on a cash advance, however. As total fees are fixed based on the factor rate, repaying the advance faster drives up your interest rate while a slower repayment lowers it.

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