Traditionally, African American business owners have struggled to obtain financing to grow, develop and maintain their businesses. When business owners can’t get the capital they need from traditional financial institutions, they usually turn to others.
One of the growing sources of alternative business capital since the Great Recession has been the Merchant Cash Advance (MCA), as well as its sister product, the Alternative Business Loan. A company by the name of AdvanceMe (today the company is known as Can Capital) brought the MCA concept to market in the very early 2000s and even tried to patent the concept, but was unsuccessful.
But it was not until the credit crunch of the 2008 recession that business owners began to turn to the MCA product in droves, causing the industry to explode. You need to be careful using these alternative ways of capital, so I am going to present you with the best tips for trader cash advance.
The best merchant cash advance for small businesses
Here’s how the MCA works: A business achieves a credit card processing volume of $ 60,000 per month, for example. This business could be approved for around $ 60,000 in terms of the advance amount, which can be used for any business purpose, like covering payroll.
The lender can set up the business with what is called a “factor rate” which results in a total payback amount of $ 72,000. To repay the advance, the lender can hold 20% of the company’s daily credit card processing volume (which in this example is about $ 400) and apply that amount to the total outstanding repayment balance. .
As long as the company maintains the same level of monthly credit card processing volume, the full refund amount would be satisfied in six months. An MCA offering based on the example above would look like the following:
- Amount of the advance: $ 60,000
- Factor rate: 1.20
- Total refund or purchase amount: $ 72,000
- Percentage withholding: 20%
Note that the MCA is not considered a traditional fixed-term loan, so if the company’s monthly credit card processing volume in this example drops to $ 50,000, then instead of six months to pay off the loan. total refund amount, it might take a little over seven months to complete. As a result, this product works best for seasonal businesses.
Alternative business loan
Unlike the MCA, an alternative business loan is structured as a true business loan with set-up costs and fixed terms. Approval is based on 5% to 10% of a company’s annual gross sales, so if a business has $ 2 million in gross sales per year, it can be approved for $ 150,000. To repay the loan, the lender will establish a fixed payment that will come out of the business owner’s bank account every working day. For the terms, let’s say the lender offers the business owner a 15 month option with an interest rate of 28%. This is what the full offer would look like:
- Loan amount: $ 150,000
- Setup Fee: $ 4,500 (based on 3% of loan amount)
- Final disbursement amount: $ 145,500
- Costs (interest): $ 42,000
- Total reimbursement amount: $ 192,000
- Daily business day payment: $ 508 (represents 378 business day payments over the next 15 months)
- Duration: 15 months
Should you use any of these products?
Many experts believe that business owners should never use the MCA or the alternative business loan, calling the products “payday loans for small businesses,” due to the fact that sometimes annual percentage rates ( APR) of the products can reach 350%.
Having offered these two products to many small business owners across the country, I think the products may work for some business owners in certain situations. For example, I normally recommended the products as a form of bridge financing, which is only a tool to help a business owner overcome a short term / temporary ‘bump’, but with an emphasis on eventually putting it back in a position where they are able to take advantage of traditional (and more profitable) business financing options.
As a business owner, you will need to consider whether or not the MCA product or alternative business loan might meet your current financing needs. As a financial professional, I recommend using the products for short term / temporary funding issues rather than as a long term corporate funding strategy.