How Does a Business Cash Advance Loan Work?

In recent times, Merchant Cash Advances (MCAs) have continued to grow in popularity. This loan product began as a solution to loan future sales of credit cards. It would later evolve into a solution that allows organizations to finance future sales of many other things. A business cash advance is probably the best way to define it. With this type of cash advance loan, you can sell off your future sales and get financed quickly.

Business loan

This is a short-term financial solution whose payback time occurs in months. The repayment process starts almost immediately. The lender can either choose a part of your continued sales or debit your business bank account on a daily basis. Looking at this structure, this facility is somewhat similar to that of short-term loan and not a business line of credit. Lenders don’t consider this a loan but a future asset sale.

Different Types of Sales

Initially, it cash advances were commonly used in the sale of credit cards and still goes on to this day. They are easy to do because the lender is able to receive repayment from their perspective. Primarily, these cash advances can be applied in financing future sales and companies have diversified on commercial sales too. The repayment procedure on the transactions is however different.

Calculation of Funding Amount

The lender determines the amount of advance to be given out by looking at past sales. Past transactions of credit card or bank statements are usually reviewed to help in giving advance loans. The funding is usually made between 80% and 150% of your mean monthly sales. The value usually varies with each lender and is also based upon the financial state of your business.

Payback Calculation

In total, the amount to be paid back ranges between 9% and 50% on top of what was issued. The lenders refer to this amount as a factor which is usually indicated as 1.09 or 1.50 respectively. Therefore $50,000 given at a factor of 1.1 will require you to repay $55,000. The pay-back period is usually short and could be between 3 months and 15 months that means higher monthly repayments than conventional loans.

Paying Back the Cash Advance Loan

This is not any different from a term loan. Funds are provided upfront and then you will be required to make regular payments to clear off the outstanding balance. For credit card sales, you will be required to share your future day-to-day revenues with the lender. The revenues percentage rate paid to the lender is known as the retrieval rate which could be anywhere between 8% and 13% of total sales. These are dealt with through slit processing using the card that processes your cards. For regular sales, repayments are made via bank account debits. The lender debits a certain fixed amount from your account on day-to-day basis to the end.

Here is a perfect example of a business cash advance loan

  • Amount loaned: $50,000
  • Factor: 1.1
  • Total repayment amount: $55,000
  • Repayment period: 4 months (weekly payment)
  • Weekly payback: $3437.50

Things to Remember

People often use a business cash advance to deal with the wrong problem. At times, firms that have continuous cash flow issues normally caused by slow-paying customers usually don’t get lasting value from a short-term solution. This is because of the way the loan is structured. Though you have been given $50,000 in the example above, you part with $3437.50 each week. By the time you make the last payment, you will only be paying the fees back.

Cash advances can also be costly. However, it shouldn’t be a big challenge of your business gets high margins on profits. Your profits can easily be wiped out by cash advances if no large margins are made on your business profits. Ideally, this is selling your future sales and it can be a big risk especially when those sales don’t take place.

Despite these challenges, it is easier to get an advance loan for your business than a bank loan. You can get this type of loan in days hence very suitable should urgent needs come up. Especially if your business has a quick pay off, this is the type of loan to go for.

The Bottom Line

If you are considering a business cash advance loan, here is detailed information on how it works. You may consider getting financial guidance from an expert like a CPA prior to making an application for this type of loan. Go through the details to determine whether this type of loan will be useful or not.


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