Merchant Cash Advances And Invoice Factoring: Good Or Bad Ideas?
Your business is in need of money, but for a number of reasons, you don’t think a traditional loan is for you. But then you hear about something that doesn’t get a lot of publicity: Selling your future receivables (sometimes called merchant cash advances), or invoice factoring. What are these kinds of loans, and what are the potential dangers of getting them?
Interest in Your Receivables
A merchant cash advance loans you money based on your past receivables. You pay put of the money you make in the future, as you earn the money. There is usually no set, monthly repayment amount, as repayment is based on the cash your business earns daily.
In most cases, these lenders will want copious amounts of financial information from your business to see what your business has made in the past. If repayment is based on future sales, the lenders want to ensure that you have a solid history of prior sales.
Often, the lenders will want a lot of information, including bank records, contracts, balance sheets and other financial information. They also may require that you deposit your credit card receivables into a joint bank account that the lender has control of, allowing them to see what your business is making on a daily basis.
The Good and Bad
The good news with many of these companies is that you will usually get funded relatively quickly—much faster than a traditional lender would. Additionally, because these lenders are banking on your future receivables, and taking a percentage of them, they aren’t so concerned about your credit rating or history.
But there are serious drawbacks to these lenders. Many will withdraw from your bank account daily, either as a regular draw, or based on the percentage of your daily deposits. The percentage that they will take often equates to an APR that would otherwise be considered usuary. In fact, there is some debate whether these companies “interest” in your future earnings is the same thing as traditional interest charged on a loan. If so, their interest rates are illegal and usurious.
You certainly have very little financial flexibility with these loans, because they are withdrawing from your account daily. This can leave your business in cash flow situations, unlike with a regular loan, where you can wait 30 days until your next payment.
Invoice factoring also is calculated on your past invoices. These are essentially advances on your business’ accounts receivables. The lender will pay you immediately when you invoice a customer, meaning you get paid immediately regardless of how long the customer takes to pay.
The interest rates with invoice factoring tend to be more reasonable, and the lenders will often not require daily withdrawals to repay the loan.
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