Busting The High Cost Myth of Merchant Cash Advances

One of the initial objections our alternative funding experts receive from merchants researching a merchant cash advance program is its cost. Let’s bust the high cost myth once and for all and see how merchant cash advances are very competitive with traditional loans. In some instances, they are better for the merchant than a loan.

First, recognize we are comparing apples to oranges. With a traditional loan, a bank charges a merchant interest for the use of their money. The hallmark of a loan is that the borrower bears most of the risk, the payments are fixed amounts paid over a fixed amount of time. By law, the bank must notify the borrower of the annual percentage rate (APR).

With a business cash advance, the business transaction is a sale, not a loan. The merchant sells future credit card sales (only the Visa and MasterCard sales with US Business Finance Corp) and the cash advance company charges a fixed fee. Two critical differences between a sale and a loan is the sale has no fixed payment period and never charges a late fee. The cash advance company bears the risk in the transaction, not the borrower. Since the alternative funding company bears the risk, they can be more lenient in both the merchant’s credit score and length of time in business – a boon to start-up businesses.

Since a merchant cash advance does not have a fixed pay-off period, (they average 6 to 9 months to pay off) we can only figure what would be a comparable annual percentage rate once it is paid off. However, right up front we can compare loans to cash advances in terms of the dollar cost of the money.

For example, if you obtain a 5 year $10,000 loan at 10% interest, you would pay $2,748 for the use of that money over the five years – not including any late payment fees. You would need to show the bank in-depth financial information, attach a personal guarantee, use personal or business assets as collateral, and the loan would affect your credit score.

If you received a $10,000 business cash advance, you would pay about $2,400 for the money, receive it quicker, not have any personal risk, personal guarantee or collateral on the line. Your balance sheet and credit score would not be affected.

Banks and lending institutions use credit cards to make outrageously expensive loans and cash advances to consumers and business owners by guiding their eye to the interest rate and keeping you from looking at the actual dollar cost of the credit. If you have a credit card charging you 14%, but you only pay a little on the balance over the course of time, the dollar cost of $10,000 in credit is astronomical.

US Business Finance Corp has a great record assisting our business customers and merchants with cash advances. Keep the dollar cost of your cash infusions down by considering our merchant cash advance solution. Contact our business cash advance specialists today!

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Filed under: Alternative Capital, Business Cash Advance, Money Matters - Business