Merchant cash advances are an expensive form of small business financing, which is why many owners want to know how to refinance a merchant cash advance. To refinance a merchant cash advance, you need to determine how much you owe, check your credit, and find another loan product for which you qualify.
1. Determine the Remaining Amount Owed
One of the greatest disadvantages of a merchant cash advance is that the entire fee for borrowing the funds is charged upfront. As such, you can’t save money by paying the debt off early. However, you can use a business loan to reduce your monthly payments to a more affordable rate. To refinance the debt, you will need to determine how much of the advance plus fees is remaining on your balance. Having this information will allow you to determine which lender and loan product will best suit your needs.
2. Check Your Credit Score
Small business owners generally opt for a merchant cash advance as a last resort when they are unable to qualify for other types of financing due to poor credit. If a low credit score was the reason why you accepted a merchant cash advance, it’s important to check your credit prior to attempting to refinance.
If your credit score has improved since you first tried to obtain financing, there are likely cheaper financing options available to you than there were when you obtained a merchant cash advance.
3. Choose a Lender & Loan Product
Once you have determined the amount of funding you need to refinance a merchant cash advance and have reviewed your credit, you can begin shopping for a refinancing product. The three most common loan products used to refinance a merchant cash advance include alternative business loans, personal loans, and invoice financing.
The most common merchant cash advance alternatives for refinancing are alternative business loans, personal loans for business, and invoice financing.
Alternative Business Loan
Alternative business loans have flexible credit qualification requirements, easy online applications, and provide quick access to working capital funding. The category of alternative business funding is comprised of everything from short-term loans to long-term commercial real estate loans through Small Business Administration (SBA) lenders. These loans are ideal for businesses that are unable to qualify for traditional bank loans.
Personal Loan for Business
Small business owners who are unable to meet the time in business or annual revenue requirements for an alternative loan may want to consider using a personal loan for business to refinance their merchant cash advance. Personal loan providers can qualify you for a loan based on your personal credit and financial information. While you may be able to qualify for a loan to refinance your merchant cash advance, a personal loan will not serve to build your business credit.
Invoice financing allows you to borrow funds based on the value of your current customer invoices. If you have customer invoices that are due within 90 days, you can borrow against the value of those outstanding invoices. The invoice financing company provides you funding upfront, which is then repaid as your customers pay their invoices.
4. Apply for Your Loan
Once you have selected the lender and loan product that best meet your business needs, you can get a small business loan. Most small business lenders offer the convenience of an online application process that can be completed in a matter of minutes. If approved, you can often receive funding within just a few business days. Loan proceeds are generally deposited directly into your business bank account.
5. Pay Off Your Merchant Cash Advance
Once you have selected a financing product that best suits your business needs, applied, and received the funding, you can pay off the remaining debt owed on your merchant cash advance. Continue to pay close attention to your merchant accounts to ensure that the daily deductions from your credit card receipts have ceased. If additional funds are collected from your credit card receipts immediately contact your merchant cash advance provider to dispute the amount collected.
Why You Should Refinance a Merchant Cash Advance
Merchant cash advances are an extremely expensive way to finance your small business needs. Business owners that use a merchant cash advance quickly realize that the sizable daily payments are unmanageable to maintain, and despite these costly payments, their merchant cash advance does nothing to help improve their credit score.
Merchant Cash Advances are Expensive
The effective annual percentage rates (APRs) for merchant cash advances can often reach triple digits, making this type of financing one of the most expensive types of financing available to small businesses. If you are uncertain as to what effective APR of your merchant cash advance, you can use our merchant cash advance calculator to determine how much your advance is costing you.
Merchant Cash Advances Have High Daily Payments
With holdback percentages as high as 30% of your daily credit card receipts, the cumulative monthly payments on your merchant cash advance can have a devastating impact on your business. As your daily sales increase, so does the amount collected by the cash advance provider. The daily holdback can make it difficult to pay your ongoing working capital expenses.
Financing With a Longer Repayment Term Can Improve Cash Flow
Merchant cash advances have short repayment terms—generally three to 12 months. Refinancing your advance with a financing option that offers you a longer repayment term can reduce your monthly payment. However, because you are charged an upfront factor fee on your merchant cash advance, you will not be able to save money by refinancing with another lending product.
When deciding whether or not to refinance your advance, you should weigh carefully the overall cost of capital of the refinance with the benefit of reduced monthly payments. Although you may pay more in the long run, the lower payments may be beneficial as your business’s immediate cash flow will improve.
A Merchant Cash Advance Won’t Build Your Credit
Payments on a merchant cash advance are not reported to any of the credit reporting agencies and, therefore, repaying a merchant cash advance will not help you build your personal or business credit. Unfortunately, the costly daily payments required for a merchant cash advance, typically hurt small business owners by making it difficult to pay other debts promptly.
How a Merchant Cash Advance Works
With a merchant cash advance, the provider purchases a portion of your future daily credit card receipts, advancing you those funds upfront. The provider then collects a percentage—often as much as 30%—of your daily credit card receipts as payment, until the factor rate, which is typically 1.1 to 1.5 times the amount advanced, is repaid.
Merchant Cash Advance Payments vs Short-term Loan Payments
To illustrate the effect that refinancing a merchant cash advance using a short-term loan would have on your total monthly payments, consider this scenario:
You borrow $100,000 using a merchant cash advance, with a factor rate of 1.3x, and a holdback percentage of 25%. Your daily credit card sales are $10,000.
Your repayment on the merchant cash advance would look like this:
- Your total amount to repay on the advance is $130,000 ($100,000 x 1.3)
- The merchant cash advance provider collects $2,500 per day from your credit card sales ($10,000 x 25%)
- Your monthly payment towards your merchant cash advance is $75,000 ($2,500 x 30 days)
Conversely, you could refinance $130,000—the amount of the merchant cash advance plus the factor fee—with a 12-month short-term loan that has an APR of 25%.
Your repayment on the short-term loan would look like this:
- The total cost of capital would be $162,500 ($130,000 + $32,500 in interest)
- Your monthly payment would be roughly $13,542 ($162,500/12 months)
With this example, while you would have a higher overall cost of capital on the short-term loan, your monthly payments would be significantly lower than they were with the merchant cash advance. This will improve your business’s monthly cash flow.
Merchant Cash Advance Frequently Asked Questions (FAQs)
A lot of information has been covered in this article about how to refinance a merchant cash advance, determining the right lender and loan type for your refinance, and the overall pros and cons of merchant cash advances. We have addressed some of the most frequently asked questions pertaining to merchant cash advances below.
What is a business cash advance?
A business cash advance—also referred to as a merchant cash advance—is given in return for a percentage of a business’s daily credit card receipts. Merchant cash advance providers charge a factor rate of 1.1x and 1.5x of the amount advanced. This results in a cost of capital that’s much higher than other online business loans.
How do cash advance companies work?
Cash advance companies work by providing your business a lump sum payment upfront in exchange for a fixed percentage of your future credit card sales. In exchange, the provider receives a percentage of your business’s daily credit card receipts until the advance, plus any additional fees, have been paid in full.
Do cash advances hurt your credit score?
Receiving a cash advance does not directly impact your credit score, but it can potentially cause other issues that will have a negative effect. Cash advances are an expensive form of financing, and payments are directly deducted from your merchant account, which may impact your ability to make payments on other operating expenses.
Small business owners who have used merchant cash advances as a means of financing their business quickly realize this form of financing is costly and seek out means of refinancing the debt. Common options for refinancing merchant cash advances include alternative business loans, personal loans, and invoice financing.
Small business owners interested in refinancing their merchant cash advance may want to consider a short-term loan through BlueVine. If you have a credit score of at least 600, six months of business operations, and annual revenues of $100,000 or greater, you may qualify. You can apply online in minutes.