Truths About Merchant Cash Advances

Francisco J. Acosta shares insights.

I speak to small business owners all the time about merchant cash advance (using your credit card volume to secure funding), which is the best kept secret in finance. Their first response is usually, “It’s too expensive.” My response is, “Compared to what?” To which they reply, “Banks.”

I’m always surprised by this basic misunderstanding. I have 574 banking contacts in all of the major banks in the New York area, and even some of those don’t understand the power of cash advance. I will clarify the issue so there is complete understanding. This way, you can make an informed decision.

Let’s do a straight forward comparison of the two financial instruments.

Banks loan you money based largely on your FICO score. Anything under 680, usually results in a decline. For business loans under $100,000, the decline rate is up to 98%.
Cash Advance Funding companies (CAFC) base the advance on the overall volume of your business and the total amount of credit card volume you accept. The approval rate is 96%.

Banks insist that you put up collateral to secure the loan, and sign a personal guarantee.

CAFC funds are completely non-collateralized, and have no personal guarantee. This means that if you default, you will not lose your house, car or business.

Banks demand repayment on a fixed schedule and over a period of 5 years. Missing even one payment can result in dramatically increased interest rates.

CAFC repayments do not work on a fixed schedule. The repayment is based on the ebb and flow of your day-to-day business revenue. Repayment is typically done within 6-9 months.

If you need more money from a bank during the repayment period, you will almost certainly not get it.

The CAFC repayment happens within 9 months. 82% of merchants renew for additional funding.

Now, let’s get to the cost. Federal law caps interest rates at 18%. However, there is a simple way around this. It’s called compound interest. So, if you get charged the maximum because of your bad credit, you will pay a total of 52%. How’s that possible? Click the following link to check out the screencast to see compound interest at work: .

The fee for a cash advance is fixed at 35-39% depending on the funding company and your circumstances. It is simply added to the advance amount and recouped during the repayment period. For business owners who have used a cash advance, the word I hear the most is, “Painless.” The bottom line is, if you can get the bank’s best rate and don’t mind putting up everything of value that you own to get the money, by all means use the bank. Otherwise, see if cash advance is right for you.

Francisco J. Acosta
Executive Vice President
Internal Business Consulting
212-330-0311 Phone
E-Mail [email protected]
Web Site

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