How to Choose the Best Merchant Cash Advance Services
The top performers in our review are PayPal Working Capital, the Gold Award winner; Square Capital, the Silver Award winner; and American Express Merchant Financing, the Bronze Award winner. Here’s more on choosing a merchant cash advance lender to meet your needs, along with detail on how we arrived at our ranking of 10 lenders.
Many entrepreneurs know the joys of owning a small business. You're bringing your expertise and love of a trade or product to your customers, and you're doing it on your own terms. However, unexpected downturns or cash flow emergencies can sour a sweet gig. When harder times crop up suddenly, many small business owners turn to merchant cash advance services. Financial services that provide a large cash influx to businesses in as little as one day aren't exactly providing loans. A merchant cash advance is a notoriously expensive funding solution.
This fast-cash option can be tempting when you hit a seasonal low or equipment gives out on you and needs to be replaced immediately. However, a business cash advance can be more costly than it appears.
The total cost of the loan (which, by the way, merchant cash advance services won't call it) includes repayment fees that can soar to almost 40 percent of the original borrowed amount. It's important to be aware that a merchant cash advance can lead to a debt loop: You may need to continue borrowing money to pay back what you owe, which can cause a downward spiral toward bankruptcy. You can learn about the differences between a small business loan and a business cash advance (including the pros and cons of each) in our articles on merchant cash advances.
If time isn't a factor and your personal credit score is good, then a small business loan, like the SBA 7(a), is likely a better option with its excellent interest rates and longer repayment terms. Additionally, these loans, offered by banks and credit unions, are guaranteed by the Small Business Association.
Merchant Loans: What Are They?
Merchant cash advances are often referred to as payday loans for businesses. There's a good chance that if you're already having cash flow issues, a merchant cash advance is going to exacerbate your situation. Make sure you understand what working capital loans for businesses are before jumping into a business deal with these financial services.
Although a merchant cash advance seems like a loan, it's technically labeled as a commercial transaction, which means the financial services are not subject to the same regulations that banks, credit unions and other financial institutions are by the federal government. This is why rates can be so high and repayment terms can be problematic for struggling small business owners.
Contracts can be lengthy and confusing, so read through them and other documents carefully and ask questions of the lender to make sure you understand. Some of the terms may be unfamiliar because these services are not the same as the banks and credit unions you're accustomed to working with. Be certain that every fee discussed and agreed upon is in writing before you sign a contract.
Some business cash advance companies aren't forthcoming with fee percentages or repayment costs and terms when you first contact them. Most of them expect you to go through with the application process, which often involves a hard credit check, which can put a mark on your report, before they reveal more information.
In fact, a representative from one lender we spoke with wouldn't provide us with information that we were able to glean from the calculator on the lender's website unless we submitted an application. Look for a lender that is transparent regarding its fees and terms and is willing to communicate with you about the process and what you should expect.
Merchant Cash Advances: Does Your Business Qualify?
Most small business owners can easily qualify for a merchant cash advance, which is another reason why it's such a tempting solution. The qualifications vary lender to lender, but generally, you need to 1) own a business for at least three months, and; 2) meet a minimum in terms of credit or debit card sales generated per month.
PayPal Working Capital, the best merchant cash advance service, requires that you ring up $20,000 in sales per year, that you use PayPal to process payments and that you've been doing so for at least three months. Fora Financial also has forgiving minimums: You need to have been in business for three months and you need to provide four months of bank and credit card statements when you apply.
Only our two highest-rated merchant cash advance companies don't require personal credit checks: PayPal and Square Capital. Most want to examine your credit history, which can hit your report hard if you're applying with several lenders. Even if your business qualifies for a cash advance, you could be rejected for other factors, which are solely at the discretion of the lender.
Small Business Cash Advance: Repayment Terms
As with all of the other determining factors, your repayment terms after securing a merchant cash advance can vary lender to lender. Here's what we found:
This is the percentage that you will pay back, or interest, which is usually a flat, fixed fee. However, it's not an annual percentage rate (APR), and it's often referred to as a factor rate. These rates can reach as high as 39 percent from the best merchant cash advance services. The best rate we found was from PayPal at about 6 percent. American Express Merchant Financing also offered rates as low as 6 percent, but can go up to 14 percent. If you were to get a cash advance of $10,000 at 25 percent, you would pay back $12,500, or a factor rate of 1.25. So, you would be paying $2,500 to borrow $10,000.
You usually have the option of paying back what you borrowed by setting up daily remittance, which is pulled directly from your credit card sales, and it's based on a percentage. This means that you and the lender agree on a percentage of the borrowed amount in advance, and you pay based on what you earn every day.
Say, for instance, you borrowed $10,000 and agreed to pay back 10 percent of your earnings every day. If you earned $1,000 in credit or debit card sales one day, the merchant cash advance service takes $100 that day. If you only made $300 in sales that day, the lender only takes $30. If you're having a good sales month, you could potentially pay off your advance quickly. If not, it could take much longer to repay it. Alternatively, you could set up a monthly payment schedule at a fixed amount so you aren't out more cash than you anticipate.
Risk is always involved when a financial service lends money. So, it would benefit the lender to offer incentives to have you repay sooner rather than later. Some merchant cash advance companies offer discounts to small businesses that pay back the full amount borrowed in advance of the term length. This means you end up paying a lot less in interest. However, the longer you take to repay what you've borrowed means the service gets back the full factor rate, or interest, it's charging you, which is why only a handful of these services offer these rebates.
Aside from the factor rate you pay on top of what you borrow, many merchant cash advance businesses tack on extra fees that drive the cost of this loan higher. Nearly half of the services in our lineup charge an origination fee, which is a processing fee that normally ranges from 2.5 to 4 percent of what you borrow.
Capital for Merchants and Fora charge an application fee that's meant as a processing fee. It can usually be deducted from the amount you borrow, or it could be an upfront cost. These additional fees add up and can cost you in the end.
Benefits of Alternative Business Funding
Although many financial advisors suggest exercising caution regarding alternative business funding like merchant loans, there are many benefits to choosing this lending route for your small business.
Many of the merchant cash advance services can approve your application in only minutes and transfer the borrowed amount to your business account within 24 hours. So, when you need to make payroll or you want to jump on a business opportunity and can't wait weeks for approval, this lending method seems ideal. Even the slower of the business cash advance companies get money to you within three days after your application is approved.
When you repay a loan a little at a time, such as with a 5 percent hold-back rate, which is the percentage you agree to repay daily based on your incoming revenue, it doesn't hit your business's bank account as hard as a lump sum at the beginning or end of every month. And because the amount you repay is based on how much you make each day, you aren't paying back a lot of money if you aren't also earning a lot.
Low Personal Risk
You don't put up personal property as collateral when you get a merchant cash advance, so you aren't risking losing your car or home if you can't repay the cash advance. These unsecured loans sometimes come with a required personal guarantee, though, which means you're personally responsible for repayment. ForwardLine and CAN Capital require you to sign a personal guarantee if you are approved for a loan.
Take Your Time
Retail business can be fickle at times, so it may take you longer to pay back what you borrow. Most business cash advance companies won't penalize you if you exceed your repayment term. This can be helpful if business slows down because of seasonal changes or construction near your brick-and-mortar business.
Merchant Cash Advances: Our Verdicts & Recommendations
To find the best merchant cash advance service, look out for a company transparent about its rates and fees. It should offer low repayment costs and penalty-free repayment terms. If you can afford it, it's best to find a company that offers prepayment discounts so you pay less in interest.
If you're already using PayPal for credit card processing, it's a good lender option. PayPal requires that you make $20,000 per year in sales, and it lets you borrow as little as $1,000. You can repay the borrowed amount based on a fixed daily percentage, which is less of a hit to your bank account than a monthly cost. Also, its repayment cost averages 6 percent, the lowest rate among the services we evaluated.
Square is another good choice, especially if you're already a customer of the credit card processing company. Its repayment cost is lower than the average at a range of 11 to 15 percent, and it has no minimum repayment requirement, which gives you more flexibility as you pay back what you've borrowed.
American Express also offers one of the lowest repayment costs of the merchant cash advance services we reviewed at 6 to 14 percent. The company may require a personal guarantee so they're sure they get their money back, but it also offers a prepayment discount, so you can cut the cost of your cash advance even lower than your first agreement. Qualified businesses can borrow up to $2 million, the most of all the services we evaluated.
Rapid Capital Funding doesn't tack on extra fees, such as application or origination fees, but it is one of the potentially priciest services overall – you could end up paying as much as 39 percent on top of what you borrow.
Brand new businesses may have a harder time finding funding solutions, so Fora might be a good option. It only requires that you be in business for at least three months, and you can get a quote over the phone. Your cash flow has to be high though – you need to prove your sales are at least $10,000 per month.
There are alternative business funding solutions available, but if you've exhausted your resources and you need cash now, a merchant cash advance may be what's best for you and your small business. Be sure to read contracts carefully and that you understand what you're agreeing to before signing on the dotted line.
Disclaimer: The interest rates listed are reflective of the date this review was last updated.