Not So Fast! What You Need to Know About Fast Cash Lenders
With the rise of technology as a means to expedite financial services, there are a variety of fast cash lenders out there today, ranging from Merchant Cash Advance (MCA) lenders to more full service online lenders. These lenders will contact you and promise quick cash with few strings attached, but what is the true cost? Today we will explore what these companies do, the true cost of funds and what your options as a business owner are.
Part One: What and How
Borrowing: A traditional Merchant Cash Advance lender provides unsecured loans which feature little underwriting and fast access to cash. Since the loans do not require collateral, they can process them quickly, but they hold higher credit risk than other types of loans. To account for these risks, the MCA's charge a flat rate (factor). For example, if you borrow $20,000 at a factor rate of 1.4 you will repay $20,000 x 1.4 = $28,000.
Repayment: There are several ways to structure repayment. The MCA can either take a percentage of your future sales (less common) or structure a fixed payment based on projected future sales (more common). These payments are drawn directly from your bank account weekly, or more often, daily. Early payback holds no benefits because there is a fixed fee already built in.
Part Two: The Good and Bad
The Benefits: Honestly, the only benefit is that you get the cash you need quickly. Aside from this, the terms are not particularly friendly to the borrower.
The Drawbacks: The cost. Simply put, this is an expensive option. Using our example from last week, we borrowed $20,000 and needed to repay $28,000. If we paid back $155 each day, it would take us 180 days to pay it off. This means we paid $8,000 in "interest" to have this loan for 6 months. This is an equivalent 80% APR. Depending on the payback period (remember paying back more quickly does not save on your fees), the equivalent "interest rate" can be over 100%. In addition to the main factor rate, there are often many other fees to get the deal done.
Part Three: Your Options
At 12five we specialize in helping growing business have the working capital they need to fuel their growth and cultivate their passions. This often comes in the form of short term financing. As we have covered Merchant Cash Advance and other fast cash online financing above it is important to understand how factoring is different.
Remember our example $20,000 that was borrowed from an MCA previously, and it was repaid at $28,000. In a factoring relationship, that $20,000 check you were waiting on would be submitted as an invoice and we would advance 85% ($17,000). When the debtor pays us, we send the rest of the money, less a small fee (usually 3-5%). This means that instead of the $20,000 costing you $8,000 it could cost you $600.
In the event that your invoices are currently factored but you need additional funds, often we can find creative solutions to bridge those gaps as well. The first step is talking with someone about your cash struggles. The more we know, the more we can help!
It is common to experience a cash crunch and often feels like there are no good options to obtain financing. There are a variety of financial institutions that promise to alleviate your problem but it is important to recognize the true cost of these funds. If the fees are too high, it can start a vicious cycle of taking on more debt to pay off existing debt, and that cycle can take years of profitability to get out of.
At 12five we want our clients to succeed. While we know there are other options out there to find financing, we are confident we can help you meet your goals. Check us out on 12five.com for more information.