Merchant cash advance

Quick facts

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A merchant cash advance is a type of business cash advance. It is designed with retail businesses in mind. If your business takes regular payments through a card terminal, you can use your recent takings as the basis for this kind of loan.

A merchant cash advance uses your card terminal to ‘secure’ lending and get cash fast. You don’t need to have valuable assets but you do need a good volume of card transactions every month. The lender takes payments as a proportion of your revenue. This means that when things are going well, you pay more back each month, but if your business is going through a lean period you pay a smaller amount.

With a merchant cash advance, the lender works directly with your terminal provider (i.e. the company that processes transactions for you) so they can see how much money is flowing through your business. That means that unlike other types of lending, the lender does not need to carry out credit checks or scrutinise your accounts. The percentage the lender takes for repayments is never in your business’s bank account, but instead is ‘taken at source’ – in the same way that most people pay income tax.

Factor rate

The total cost of a merchant cash advance (i.e. the amount you pay back to the lender) depends on the factor rate. This is a decimal figure (not a percentage) used to calculate how much the advance will cost you. For example, if you borrowed $10,000 at a factor rate of 1.2 for a 12-month term, you’d pay back a total of $12,000. The calculation is simply $10,000 x 1.2, which gives you $12,000.

Although this calculation looks like it’s based on a percentage rate of 0.2%, it’s not! With an merchant cash advance all of the interest is charged to the principal when you take out the advance. This is the key difference between factor rates and interest rates. It’s why the merchant cash advance isn’t priced using APR – APR is used for financing where interest accrues on the principal loan amount, which will get smaller and smaller as you make successive payments.

Lenders will vary the factor rate according to their assessment of your business, the industry you’re in and their own risk assessment. Typical factor rates are between 1.1 and 1.5.

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Disclaimer: Swoop Finance Pty Ltd (ABN 52 644 513 333) helps Australian firms access business finance, working directly with firms and their trusted advisors. We are a credit broker and do not provide finance products ourselves. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Swoop Finance Pty Ltd can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness, we may receive a commission or finder’s fee for effecting such introductions. Swoop Finance Pty Ltd does not provide any kind of advice and in giving you information about providers products, we are not making any suggestion or recommendation to you about a particular product. Offers of finance are subject to a separate assessment process by the provider and subject to their terms and conditions. If you feel you have a complaint, please read our complaints section which is contained within our terms and conditions.

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