Merchant Cash Advance Rates: What You Need to Know

If you're a small business owner in need of quick financing, chances are you've come across merchant cash advances (MCAs) as an option. MCAs are a type of funding that involves a cash advance based on a business's future credit and debit card sales. While MCAs may seem like a convenient way to get money fast, it's important to understand how rates work before signing up for one. advance cash services inc.

Understanding MCA Rates

MCA rates are typically expressed as factor rates rather than interest rates. A factor rate is a decimal number that represents the amount a business will pay back in addition to the principal borrowed. For example, a factor rate of 1.2 means that a business will pay back $1.20 for every $1 borrowed. While factor rates may seem simple enough, they can be deceptive because they can't be easily converted into an annual percentage rate (APR) like traditional loans. This means that it's often difficult to compare MCA rates to other financing options.

Factors That Affect MCA Rates

MCA rates are determined by several factors, including the business's creditworthiness, the amount borrowed, and the repayment term. Generally, the less creditworthy a business is, the higher the factor rate will be. Similarly, the more money a business borrows and the longer it takes to repay the advance, the higher the factor rate will be.

Creditworthiness

Unlike traditional loans, MCAs do not require a credit score. Instead, MCA providers typically look at a business's credit and debit card sales to determine eligibility. However, if a business has a low credit score, it may be considered a higher risk and be offered a higher factor rate as a result.

Amount Borrowed

The more money a business borrows, the higher the factor rate will typically be. This is because MCA providers assume a greater risk when lending larger sums of money. As a result, they may charge a higher rate to compensate for that risk.

Repayment Term

MCA rates are also affected by the length of the repayment term. The longer a business takes to repay the advance, the higher the factor rate will generally be. This is because MCA providers charge higher rates for longer repayment terms to offset the risk of nonpayment.

Comparing MCA Rates

Because MCA rates are expressed as factor rates, they can be difficult to compare to other financing options. However, it's important for businesses to understand how MCA rates compare to other types of funding, such as traditional loans and lines of credit. One way to compare MCA rates to other financing options is to determine the APR. While MCA providers may not provide an APR, businesses can estimate the APR by multiplying the factor rate by the repayment term. For example, if a business borrows $10,000 with a factor rate of 1.2 and a repayment term of 6 months, the estimated APR would be 48%. This is calculated by multiplying the factor rate of 1.2 by the 6-month repayment term, which equals 1.2 x 6 = 7.2. The 7.2 is then converted to a percentage by multiplying by 100, which equals 720%. The estimated APR can then be calculated by dividing 720% by 12 (the number of months in a year), which equals 48%.

Conclusion

While MCAs can offer a convenient way for small businesses to access quick financing, it's important to understand how rates work before signing up for one. MCA rates are typically expressed as factor rates, which can be difficult to compare to other financing options. Businesses should carefully consider the amount borrowed, the repayment term, and their creditworthiness when evaluating MCA rates. cash advance yakima. Additionally, businesses should estimate the APR to better understand how MCA rates compare to other types of funding.