Unlike a loan, a Merchant Cash Advance is not assigned an annual percentage rate. Instead, you pay a factor rate. The factor rate is conveyed as a decimal point and it is the amount that you agree to repay to the advance provider. Although the fee can vary, it is usually between 1.3 and 1.7.
The factor rate is often a misunderstood aspect of a Merchant Cash Advance. It actually makes the interest rate appear lower, making this financing option too good to be true. It is very important to take the time to run the numbers, you will see that Merchant Cash Advances are one of the most expensive borrowing options. This is why we prefer to work with clients before pursuing a Merchant Cash Advance.
We often see Merchant Cash Advances taken with a high factor rate. If you are borrowing with a low credit score, you fall victim to a subsequent high factor rate. For a merchant with a high factor rate, the Merchant Cash Advance fees are very expensive. Due to the unfamiliar method of determining these fees and collecting repayment for MCAs, many merchants find it difficult to determine whether they’re getting a good deal on a cash advance.
Here is an example:
A Merchant Cash Advance of $60,000 with a factor rate of 1.5 means that you multiply the two numbers and come up with a total of $90,000. In turn, the fees equal $30,000— that’s half the amount of the initial advance! These high costs in addition to daily payments can cause major cash-flow problems.
Regardless of other financial and even payroll obligations, MCA repayments are made daily, BEFORE any other financial obligations. These priority repayments can and do attribute to cash flow problems for a business. Sometimes the cash shortage results in a financial crisis of such severity that the merchant may go out of business. Often, however, business owners call upon American Finasco to settle with the MCA vendor once the business can no longer keep up with the MCA payment terms.
American Finasco has several options to reduce your commercial debt which allows you to stay focused on your business. We provide strategies and take the pressure off business owners who are having a hard time managing their debt. The first step when dealing with creditors is a phone call to American Finasco. We provide our clients effective solutions for business debt relief.