Due to the financial crisis nowadays, people are looking to get cash advance loans for their businesses instead of paying from their pockets. According to the current statistics observation, the financial situation of every country around the world is getting worse. Businesses are closing down, and people are working on minimum wage for their living.
Getting a business cash advance loan is a great way of either paying for your business expenses or you just want some extra cash on the side for a financial emergency. However, there are many pros and cons to a cash advance.
For example, if you don’t keep up your monthly payments on the cash advance, you might get more debt. But we devised and discussed everything about a business cash advance loan to secure your procedures. You will understand what business advance loan is, how it works, what are the merits and demerits of it, and whether you should get one or not.
What is a business cash advance loan
During recent years, cash advances have gained a lot of popularity. It started as a means to finance future credit card sales, but it has turned into something that helps businesses future sales of any type. The process behind a business cash advance loan is that you can put up future sales as collateral and get a loan based on it. The process involves quick payback and is similar to a short term loan, rather than a line of credit. The loan provider usually takes a percentage of your current sales or they debit your bank account daily. The repayment process begins immediately as well and you are required to pay a certain amount every month or week, which usually depends on the amount of loan you are getting from the provider. However, the loan provider usually refrains from calling it a business load and calls it a sale of a future product or asset of a company.
Credit card sale versus commercial sale
A business cash advance loan enables us to fund different types of future transactions and sales. Transactions done from a credit card are the most common type of sales that are funded with a cash advance because repayment is easy when seen from the lender’s point of view. Nevertheless, companies may use this type of loan to fund future sales, and the repayment method is a little different than a future credit sale funding method.
Calculation of amount funded
The provider of the cash advance loan usually looks at the company’s past sales. He or she may also look at your previous credit-card transactions and your bank statement to get a better idea of the cash coming in and going into your account. When a company is approved, they might get a cash advance ranging widely between 80 percent or 160 percent of their monthly sales figure. However, the amount that might be loaned out will vary from lender to lender and will ultimately be decided by a company’s financial situation.
Calculation of payback amount
The amount to be repaid varies and can be within the range of 9 percent to 50 percent more than the amount that was loaned. Providers use the term ‘factor’ to define this process. Ranging from 1.08 to 1.5, the amount that was loaned is multiplied by this ‘factor’ to determine the amount of money that needs to be paid back. For example, if a business takes 10,000 dollars from a provider, with a factor of 1.35, the business has to pay back 13,500 dollars to the provider. This type of loan is usually short term and needs to be paid back in either 3 or 15 months, which depends on the payment plan you have agreed with the loan provider. For the calculation of the APR of such a transaction, you will have to take into account the ‘factor’ and the repayment period.
How to repay the loan
The process of repaying a cash advance is similar to a term-loan. Some providers take cash payments, while others use bank account debits where a certain pre-decided amount is debited from your bank account every month till the balance is compensated completely. As discussed earlier, if you are loaned an amount of 10,000 dollars from a lender, at a rate of 1.35, the payback amount will be 13,500 dollars. However, the amount needed to be paid back depends on what period you have agreed with the lender. For example, if the amount of 13,500 dollars is to be paid back in 4 months, through weekly payments, the amount you need to pay each week will be 843.75 dollars, which will continue for 16 weeks.
Pros and cons of a business cash advance loan
Like any other type of loan, a business cash advance loan has many pros and cons. We will share the most important of them with you today.
Advantages
Some businesses use a cash advance loan to solve the incorrect type of financial problem, and this can be very dangerous for them. For example, as we discussed earlier, a company that has taken a 10,000 dollar loan, they need to pay back 13,500 dollars. The business would have to pay a weekly amount of 843.75 dollars. By the 6th week, the company would have paid back a little more than 5,000 dollars, which means they have lost half the amount of the cash they borrowed. By the 13th week, the company would have paid back the amount of loan they got and are just paying the lending company’s fee. This type of loan is very dangerous for companies that are not making a certain amount of profit every month or week. Sure it can help them solve temporary financial difficulty; however, if they don’t have a profit, they will be stuck in a critical situation.
Disadvantages
This type of loan can be easy to get as compared to a bank loan. Most cases are approved, and the money is loaned within a few days. This type of quick cash loan can help out a small business that may be having difficulties with capital investment. However, it is risky and a cash advance loan should not be taken if you do not have a way of paying it back weekly.
Alternative solutions
An SBA Microloan is a great alternative for small businesses that are struggling financially. This sort of loan can get you up to fifty thousand dollars and can be availed by companies that have small or no credit at all.
Final Word
A business cash advance loan is a great way for small businesses to remedy a short term financial problem. Many upstarts are undergoing such a financial problem every day, and they do not know what to do. Getting a cash advance loan can help them out greatly. However, if you are a business that just started, you should know that this type of loan can be very expensive for you. If you are a startup or a small business owner you and do not know what a cash advance loan is, do not worry, as in this article we have shared with you every detail that defines what this type of loan is, how to get it, and whether you should get one or not.
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