When all available means of financing have all but dried up there is one form of capital acquisition that has become readily available. It is offered to small business owners and comes in the form of a business cash advance. What makes it a viable option for many is that for the most part what determines the terms and conditions are previous sales history and not credit history or available collateral.
The application process is much easier than that of traditional financing. Most lending institutions simply require three to four months of both business bank statements and merchant account statements along with a one page application. Final approval is received in as little as twenty-four hours.
The terms are also much different than conventional business loans. While in a typical business loan there is a set interest rate and term (usually in years) to pay back the loan, a business cash advance has a factor rate, holdback percentage, and a term (usually in months).
Let’s compare the two to determine total cost. When borrowing $50,000 under conventional parameters you may be looking at a seven-year term (84 monthly installments) at an interest rate of 7%. Monthly installment payments of $755 for that time period will equal a total of $63,420. When borrowing capital using a business cash advance a typical factor rate might be 1.35 with a holdback of 20% and a term of 15 months. This would equate to a total payback amount of $67,500 over the course the 15 months by holding back 20% of sales each day.
It is obvious to see that a business cash advance is more expensive than traditional lending, but approval rates needs to be taken into account when forming an opinion on this available tool to help a small business grow. At smaller banks business loans are approved roughly 45% of the time while at big banks ($10 billion+ in assets) are approving small business loans at an atrocious sub 10% level. Business Cash Advance approval rates on the other hand are up near 85%-90%.
Although the costs are somewhat elevated so too is to the risk to the lending institution supplying them. Basing a loan on just a few months of sales data is a dangerous undertaking. This is why the lenders of a business cash advance take on a more proactive approach when collecting their money. The borrower will either have to currently be using or change to one of the lender’s approved credit card processing companies. The lender then is able to automatically withdraw a certain percentage of the daily credit card sales straight from processing until the business cash advance is paid off.
Lenders of business cash advance services are claiming to have many repeat customers who are very satisfied with the process. It truly is one of the few ways way that enable small business owners to acquire capital to help their businesses grow. It is for this reason that it is expected that the business cash advance industry will not be slowing down anytime soon.