A business line of credit is a flexible funding option that allows you to draw funds from a set credit limit. It operates similarly to a credit card in that funds can be accessed as needed and reused once repaid, making it a form of revolving credit.

Business lines of credit through our lender network have the following features:

• Max Funding Amount: $1k – $1 million.
• Factor Rates: Starting at 1%/mo
• Terms: Up to 36 months
• Funding Speed: 1 – 3 days

Unlike term loans, which provide a lump sum of capital with fixed monthly payments, a revolving line of credit allows more dynamic access to cash. Businesses typically only pay interest on the funds they draw from a business line of credit, rather than the full amount approved.

Types of Business Lines of Credit

Business lines of credit come in various forms, catering to different business needs and requirements. Understanding these types can help you choose the best option for your company:

• Secured Business Lines of Credit: Secured lines of credit require business assets as collateral, which can lower interest rates but also carry additional risks. Because the lender has a form of security, secured lines of credit typically offer lower interest rates and more favorable terms. This option can be beneficial if you have valuable assets and want to take advantage of competitive rates.
• Unsecured Business Lines of Credit: These do not require collateral, making them more challenging to qualify for. Unsecured lines of credit typically have higher interest rates and stricter repayment terms. However, they are a good option if you don’t have significant assets to offer as collateral but still need flexible funding.
• Revolving Business Lines of Credit: These allow businesses to borrow and repay funds as needed, with the credit limit replenishing as repayments are made. Revolving credit is ideal for covering ongoing expenses and provides a continuous source of funds if repayments are managed effectively.
• Non-Revolving Business Lines of Credit: These provide a one-time loan amount, which the business must repay before accessing additional funds. This option is suitable for specific, one-time expenses where you don’t anticipate needing to borrow again soon.

Can I Get a Business Line of Credit with Bad Credit?

Yes, it’s possible to qualify for a bad credit business line of credit, primarily through alternative lenders like Profunding Options’s partner network. While traditional business loans from banks may have stringent requirements, online and non-bank lenders are often more flexible in their lending criteria.

Through PFO, businesses may qualify even with a low credit score, provided they meet minimum criteria related to monthly revenue, cash flow, and time in business. In some cases, businesses can receive approval and funding on the same day.

What Factors Do Lenders Evaluate for a Business Line of Credit?

While bad credit doesn’t automatically disqualify you, lenders still assess risk across several key areas when reviewing your business line application. Applying for a line of credit can be easier if you already have a business checking account with the lender.

Here are the key factors lenders consider when evaluating a business line of credit:

Credit Score

Your personal credit score and business credit score reflect your credit history and how responsibly you’ve handled past debt. Most business lenders perform a credit check during their underwriting process, though many use soft pulls that don’t impact your score.

Annual Revenue

Lenders want to see that your business generates consistent income. Higher annual revenue reduces the perceived risk and may qualify you for larger credit lines or more competitive interest rates.

Time in Business

Businesses with longer operating histories are viewed more favorably. Typically, lenders require a minimum of 6 months to 2 years of business experience. The more established your company, the more likely a lender is to overlook a low personal credit score.

Cash Flow

Strong cash flow demonstrates your ability to make on-time payments, which can be particularly beneficial when you have bad credit. Some lenders will also review your business bank account activity for recent deposits, balances, and spending behavior.

Collateral

Some lenders may require a secured line of credit backed by assets, such as equipment, inventory, or accounts receivable. Providing collateral for a business line of credit can help mitigate a low credit score, as it offers lenders an additional level of security.

Most approved business owners we work with meet these minimum qualifications for bad credit business loans:

• Annual Revenue: $240k+
• Credit score: 475+
• Time in business: 6+ months

Some online lenders, such as OnDeck, make the application process easier for borrowers with bad credit. OnDeck’s application process involves only soft credit checks, which do not affect the applicant’s personal credit score. OnDeck offers unsecured lines of credit that protect business assets from the need for collateral.

How to Apply for a Bad Credit Business Line of Credit:

Here’s how to apply for a small business line of credit with our network of lenders:

Step 1: Determine how much funding you need

Unlike other loans, LOCs are often not pursued with specific investments in mind. After all, you’re supposed to apply before you need the money. For this reason, aspiring borrowers might not know exactly how much funding to request. So, think about how you’ll most likely use the funds and why you are applying in the first place. This will help us understand why you’re requesting this amount.

Step 2: Gather your documents

Depending on your credit history, you might not need all the following documents. However, it’s better to have them on hand just in case:

• Business bank account statements from the past three months.
• Driver’s license.
• Voided check from your business checking account.

Step 3: Complete the application

You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.

Step 4: Speak to a representative

Once you apply, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.

Step 5: Receive approval

If and when approved, funds should appear in your bank account in 1-2 business days. Once you start drawing funds against your credit limit and paying them off, you’ll begin to build your business credit.

What Are the Benefits of Bad Credit Business Lines of Credit?

A bad credit business line of credit provides several significant advantages for credit-challenged business owners. This type of business financing provides small businesses with the flexibility they need to manage their cash flow, cover operating expenses, and invest in growth opportunities as they arise. Unlike a traditional business loan, borrowers only pay interest on the amount they draw, making it a cost-effective way to access working capital.

Because a business line of credit is a revolving credit account, it can be reused once repaid, providing ongoing financial support without the need to reapply for the credit. These credit lines are highly versatile and can be used for a wide range of business needs, including payroll, marketing campaigns, purchasing seasonal inventory, or handling emergencies.

Many business lenders also offer instant funding or approvals within one business day, helping small business owners access capital quickly. Additionally, making regular on-time payments and using the credit line responsibly can help build business credit, particularly if the lender reports repayment history to commercial credit bureaus.

What Are the Drawbacks of Bad Credit Business Lines of Credit?

Despite these benefits, a bad credit business line of credit also comes with several drawbacks. Borrowers with lower personal credit scores or business credit scores may face higher interest rates and fees compared to those with a good credit score.

Credit limits are often smaller than those associated with term loans or equipment loans, which may limit the impact of the funding. Some lenders may require a personal guarantee, even for an unsecured line of credit, thereby increasing the personal financial risk to the business owner.

Additionally, repayment schedules can vary, and the lack of fixed monthly payments may make budgeting more difficult than with other financing options. Finally, not all lenders report payment history to business credit bureaus, which may hinder efforts to build credit or improve your credit history.

Bad Credit Business Line of Credit Pros & Cons

Pros:

• Flexible funding for various business needs
• Only pay interest on drawn amounts
• Can improve business credit score over time
• Fast approval and funding, often within a business day
• Revolving structure eliminates the need to reapply

Cons:

• Higher costs for bad credit borrowers
• May require collateral or a personal guarantee
• Lower borrowing limits
• Risk of overuse and mismanagement
• Some lenders don’t report payment history

Frequently Asked Questions

Here are the most common questions about business lines of credit for bad credit.

How Do Repayments Work with a Business Line of Credit?

A business line of credit is a revolving credit account that allows for ongoing borrowing and repayment, providing flexibility for businesses to manage their financial needs. As you draw from the available funds, you begin making monthly payments based on your outstanding balance, interest, and any applicable fees.

Terms may vary by lender. Some require weekly or even daily payments, while others offer flexible repayment terms. Interest is typically only charged on the amount drawn, not the full limit.

After repayment, the available credit of a business line of credit is replenished, allowing further borrowing without reapplication. This makes it ideal for short-term, recurring, or unpredictable expenses.

Can I Build or Improve Credit with a Business Line of Credit?

Yes, a bad credit business line of credit can be a valuable tool for building or improving both your business credit score and personal credit, provided it’s managed responsibly. The key is the consistent and strategic use of the credit line to demonstrate financial reliability to business lenders and credit bureaus.

Making on-time payments on your draws is essential, as payment history is one of the most significant factors influencing your credit score. It’s also crucial to maintain a low credit utilization ratio by borrowing only what you need and keeping your outstanding balances well below your approved credit limit. This not only helps with credit building but also demonstrates prudent financial management.

Another important factor is choosing a lender that reports your repayment history to commercial credit bureaus. Not all credit line providers do this, and without reporting, your positive activity won’t help your business credit. For example, Bluevine reports repayment history to business credit bureaus, which can help improve a business’s credit score. If your lender reports each timely payment and responsible use of your credit line, it can gradually improve your credit profile.

As your score improves, you may become eligible for more favorable financing options over time, such as SBA loans, long-term loans, or higher-limit unsecured business lines with more competitive interest rates and flexible repayment terms. Small Business Administration (SBA) loans are often considered the gold standard of small business financing, but require excellent credit.

In short, using a business line of credit wisely not only helps meet your immediate business needs but also sets the foundation for stronger credit approval opportunities in the future.

What Are My Other Bad Credit Business Loan Options?

If you’re unable to qualify for a business line of credit, other bad credit business loans may meet your needs. Consider one of the following small business loans.

Equipment Financing

Equipment financing allows small business owners to purchase or lease essential machinery and equipment using the equipment itself as collateral. Because the asset secures the loan, equipment financing is easier to obtain for borrowers with poor credit and may come with lower interest rates than unsecured options.

Merchant Cash Advance

A merchant cash advance provides a lump sum of capital in exchange for a fixed percentage of your future credit card or debit card sales. Merchant cash advances are ideal for businesses with high daily sales volumes, especially in retail or food service industries, and offer quick access to funding without requiring a high credit score.

Working Capital Loans

Working capital loans offer short-term financing to cover day-to-day operating expenses, including payroll, rent, and inventory. Even with low credit scores, working capital loans can provide essential support for maintaining cash flow during slower periods or business transitions.

Revenue Based Financing

With revenue based financing, repayments are directly tied to your business’s monthly revenue, so payments fluctuate based on how much you earn. Revenue-based funding is often more accessible to borrowers with bad credit, as lenders focus more on consistent income than credit history.

Accounts Receivable Factoring

Accounts receivable factoring lets businesses convert unpaid customer invoices into immediate cash by selling them to a third-party factoring company. Invoice factoring is particularly beneficial for companies that deal with slow-paying clients and need to maintain a smooth cash flow without incurring traditional debt.

Bad Credit Business Lines of Credit – Final Thoughts

While securing funding with a low credit score can be difficult, options like a bad credit business line of credit offer a practical solution. These products provide the flexibility small businesses need to manage cash flow, cover emergencies, and invest in growth—even when traditional business loans are out of reach.

By understanding how credit lines work, what lenders evaluate, and how to improve your financial profile, you can position your business for better financing options in the future. With the right approach, your business credit score can improve, and your funding options will expand alongside it.

Contact us if you have more questions about bad credit business line of credit questions, or to apply for a small business loan. Our alternative financing experts can help match you with the best business financing options tailored to your credit profile and business goals.

The post Bad Credit Business Line of Credit: What You Need to Know appeared first on Profunding Options.

The cost of debt refers to the total interest rate a company pays on its borrowed funds. It represents the total cost of financing through loans, bonds, or other debt instruments. Companies should consider this cost when making financial decisions, as it directly impacts their profitability and overall financial health.

The degree of the cost of debt depends entirely on the borrower’s creditworthiness. Riskier companies generally have a higher cost of debt due to perceived risk by lenders.

Different Types of Debt

Debt comes in various forms, including short-term and long-term debt. Short-term debt typically must be repaid within a year, while long-term debt has a longer repayment period. Understanding these distinctions is crucial as they impact a company’s debt cost.

Relevance in Investment Decisions

The cost of debt is an essential factor in making investment decisions. It directly influences a company’s financial health and ability to undertake new projects or investments. Investors consider the cost of debt when evaluating the risk associated with investing in a particular company.

Link to Company’s Capital Structure

The cost of debt is intricately linked to a company’s capital structure. It represents the total interest expense on outstanding debts. By analyzing this cost, businesses can determine the optimal mix of debt and equity capital to maintain an efficient capital structure.

What is the Cost of Debt Formula?

The cost of debt formula is a crucial metric for companies as it helps determine the effective interest rate they pay on their debts. This calculation considers various factors such as interest rates, total debt, and interest expenses to determine the cost of debt.

A company’s effective tax rate impacts the cost of debt. Two formulas are used for the cost of debt: Pre-Tax and After-Tax.

Before-Tax Cost of Debt = Annual Interest Expense / Total Debt

After-Tax Cost of Debt = Pre-Tax Cost of Debt x (1 – Tax Rate)

Importance for Businesses

Understanding the cost of debt formula holds significant importance for businesses that rely on debt financing to meet their financial obligations. Knowing the cost of debt helps companies make informed decisions regarding additional debt or refinancing existing obligations.

Factors Considered in the Formula

The formula considers the annual interest rate and other costs associated with borrowing, such as fees and expenses. It provides a comprehensive view of the actual cost incurred by a company due to its debts, enabling better financial planning and management.

Impact on Financial Health

By accurately calculating the cost of debt, businesses can assess their overall financial health and make strategic choices about capital structure. It allows them to evaluate how much they pay concerning their total debts and how this impacts their profitability and sustainability.

Comparison with Equity Financing

Understanding the cost of debt also helps compare it with the cost of equity financing. This analysis aids in deciding the optimal mix of debt and equity to minimize overall capital costs while balancing risk.

How do I calculate Cost of Debt?

To calculate your company’s cost of debt, you can use the formula: Cost of Debt = (Interest Expense / Total Debt). This formula helps determine the percentage cost a company incurs on its debt financing.

Interest Expense: Interest expense, a vital part of the cost of debt calculation, can be computed using the formula Interest Expense = Average Interest Rate x Total Debt. Companies can accurately ascertain their interest expenses by multiplying the average interest rate by the total debt.

Effective Interest Rate: Determining the effective interest rate, or weighted average interest rate, for debt financing involves considering factors such as term debts and prevailing interest rates. This comprehensive approach provides a more realistic picture of a company’s actual cost due to its debts.

To calculate your company’s cost of debt, you can use the formula: Cost of Debt = (Interest Expense / Total Debt). This formula helps determine the percentage cost a company incurs on its debt financing.

Interest Expense: The interest expense, a vital part of the cost of debt calculation, can be computed using the formula: Interest Expense = Average Interest Rate x Total Debt. Companies can accurately ascertain their interest expenses by multiplying the average interest rate by the total debt.

Effective Interest Rate: Determining the effective interest rate, or weighted average interest rate, for debt financing involves considering factors such as term debts and prevailing interest rates. This comprehensive approach provides a more realistic picture of the actual cost incurred by a company due to its debts.

What are Pre-Tax and After-Tax Cost of Debt?

The cost of debt formula provides insights into a company’s effective cost of debt. Understanding the pre-tax and after-tax cost of debt is crucial for making accurate debt financing decisions for debt holders.

Pre-Tax Cost of Debt

The pretax cost of debt is calculated using a simple formula: (Interest Expense / Total Debt). This metric helps understand a company’s direct cost to borrow funds before considering any tax implications. The result can also help determine the weighted average cost of capital (WACC).

After-Tax Cost of Debt

After-tax cost of debt takes income tax savings and tax deductions into account and is calculated as: (Pre-tax Cost of Debt * (1 – Effective Tax Rate)). By factoring in the effective tax rate, this metric reflects the actual cost a company bears for its debt obligations after considering tax benefits. The after-tax cost of debt is the real interest rate your business pays after factoring in the tax benefits from interest payments.

Significance of Pre-Tax Cost of Debt

Understanding the pre-tax cost of debt is crucial for evaluating a company’s financial health and efficiency of debt financing.

Evaluating Efficiency: The pre-tax cost of debt helps assess the impact of debt financing on a company’s overall debt obligations. It provides insights into how effectively a company utilizes its debt capital and manages its financial leverage.

Calculating Interest Expenses: By understanding the pre-tax cost of debt, companies can calculate their interest expenses accurately. This calculation is essential for budgeting, forecasting, and making informed financial decisions.

Potential Tax Savings: Analyzing the pre-tax cost of debt also helps identify potential tax savings. Companies can assess how their interest expenses affect their effective tax rate, which can lead to strategic tax planning and optimization.

Impact of Taxes on Cost of Debt

Analyzing the impact of taxes on the cost of debt involves considering the tax savings from deductible interest expenses. The effective tax rate plays a crucial role in determining the after-tax cost of debt financing.

Tax Savings from Deductible Interest Expenses: When a company takes on debt, it incurs interest expenses. These interest expenses are tax-deductible, meaning they reduce the amount of income subject to taxation. Consequently, this results in tax savings for the company. By understanding and factoring in these tax savings, businesses can calculate their after-tax cost of debt more accurately.

Role of Effective Tax Rate: The effective tax rate is a crucial determinant when assessing the impact of taxes on the cost of debt. It represents the actual rate at which a company’s pre-tax profits are taxed. A lower effective tax rate implies higher tax savings from deductible interest expenses, thus reducing the after-tax cost of debt financing. Conversely, a higher effective tax rate means lower tax savings and a higher after-tax cost of debt.

Relationship Between Debt and Taxes: Understanding how debt and taxes interrelate is essential for precise debt cost calculation. By comprehending this relationship, companies can strategically manage their debt obligations to optimize their overall financial position. This knowledge empowers organizations to make informed decisions regarding their capital structure and financing options.

What are examples of Cost of Debt Calculation?

Calculating the cost of debt is crucial for businesses to make informed financial decisions. Let’s explore examples to understand how this is done.

Example: $5 Million in Long-Term Debt at 6% Interest Rate

Imagine a company with a principal amount of $5 million in long-term debt at an interest rate of 6%. To calculate the cost of debt, the formula involves multiplying the interest rate by (1 – tax rate).

For instance, if the tax rate is 30%, the after-tax cost of debt would be 6% * (1 – 0.30), resulting in an after-tax cost of debt of 4.2%. This example demonstrates how companies can determine their specific cost of long-term debt, enabling them to evaluate its impact on their overall financial obligations.

Multiple Loans at Varying Interest Rates

In reality, businesses often have multiple loans and existing debt with varying interest rates. To calculate the average cost of debt in such scenarios, each loan’s individual after-tax cost must be determined and then averaged based on its respective weight (the proportion each loan contributes to the total debt).

For instance, if a business has two loans—one at 5% and another at 7%, and they contribute 40% and 60% to the total debt, respectively, then the average cost of debt would be:

(5% 0.40) + (7% 0.60) = 6.2%

The result is an average cost of debt calculation that accurately reflects the company’s financial reality.

Consider a case study involving a corporation with both short-term and long-term debts. The true cost of debt considers all types of debts by considering their individual costs and proportions within the total debts.

By factoring in short-term and long-term obligations separately and then combining them using appropriate weights, businesses arrive at a comprehensive understanding of their actual cost of debt. This enables them to make strategic decisions regarding future financing or refinancing options.

How can I reduce my Cost of Debt?

You can use several strategies to help lower the cost of debt for your business.

Improve Credit Rating to Lower Interest Rates

Improving your credit rating can significantly impact the interest rates offered by lenders. A higher credit score indicates a lower risk for the lender, often resulting in lower interest rates. Making timely payments and reducing outstanding debt can enhance your creditworthiness, securing more favorable borrowing terms.

Refinance High-Interest Debts for Lower Interest Expenses

Refinancing high-interest debts presents an opportunity to reduce interest expenses. This involves replacing existing high-interest loans with a new loan featuring a lower interest rate. Doing so can decrease the overall cost of debt, potentially saving a substantial amount over the loan term.

Utilize Tax Savings by Deducting Interest Expenses

Leveraging tax savings through deducting interest expenses is another effective strategy to mitigate the cost of debt. Businesses and individuals can often deduct interest paid on loans from their taxable income, reducing tax liabilities. This essentially lowers the after-tax cost of borrowing, making it more financially advantageous.

Enhance Your Business Loan Application

Organizations can negotiate lower interest rates with lenders when taking on new debt. Using assets as collateral can help secure lower interest rates on loans.

Secured loans generally have lower interest rates than unsecured loans due to the reduced risk for lenders. Longer loan terms typically come with higher interest rates as lenders face increased risk over extended periods. Companies in stable industries often benefit from lower borrowing costs than those in more volatile sectors.

Frequently Asked Questions

Here are the most common questions about the cost of debt formula and its impact on financial management.

Why is Cost of Debt important for business?

The cost of debt is a crucial component of a company’s capital structure and is integral to its financial operations. Let’s explore its impact on other components of the capital structure, the company’s risk profile, and its integration into financial planning and decision-making processes.

Impact on Capital Structure

When considering the cost of debt, it’s essential to understand how it interacts with other components of a company’s capital structure. Debt financing, including bonds and loans, contributes to the overall mix of funding sources alongside equity financing. The interest payments associated with debt and the principal balance of financing directly impact a company’s cash flow, influencing its ability to fund operations and investments.

Influence on the Company’s Risk Profile

The cost of debt significantly influences a company’s risk profile. Higher interest rates can increase a business’s financial risk, affecting its profitability and long-term viability. Financing options that carry zero risk are rarely available.

Understanding the effective interest rate on debt allows businesses to assess their risk exposure accurately. By managing their cost of debt effectively, companies can mitigate financial risks and maintain stability in varying market conditions.

Financial Planning and Decision-Making Processes

Integrating the cost of debt into financial planning and decision-making processes is vital for sustainable business operations. When evaluating business financing options, companies must consider the interest rate and the overall cost of borrowing. This comprehensive approach enables informed decision-making that aligns with the organization’s long-term financial goals.

Pros & Cons of Business Debt

Pros:

• Allows for expansion and growth opportunities.
• Can provide necessary capital for large investments.
• May offer tax benefits through tax-deductible interest payments.
• Can help improve business credit score if managed responsibly.

Cons:

• Interest payments can add financial strain.
• Defaulting on debt can lead to serious consequences.
• Limits available cash flow for other business needs.
• Can create long-term financial obligations and restrictions.

What’s the relationship between Cost of Debt and Equity?

The Cost of Debt and Equity are components used to calculate a company’s overall cost of capital. While the cost of debt refers to the cost of borrowing, the cost of equity signifies the return shareholders require.

What is considered a high Cost of Debt?

A high cost of debt is typically considered any interest rate significantly above the average market rate. This can vary depending on the current economic conditions, but generally, a cost of debt that exceeds 10% would be considered high. However, other factors, such as the company’s credit rating and the business’s overall financial health, must also be considered when determining what constitutes a high cost of debt.

A high cost of debt indicates that a company has to pay substantial interest expenses on its borrowings. This can impact profitability and financial stability, potentially limiting growth opportunities.

How does Cost of Debt impact my business loan options?

The cost of debt directly influences the interest rates you’ll be offered when seeking business loans. A lower cost can make borrowing more affordable, while a higher cost might limit your loan options or increase expenses.

You may be interested in one of the following small business loans:

• Bad credit business loans
• Business line of credit
• Business loans for women
• Business term loans
• Equipment financing
• Accounts receivable factoring
• Merchant cash advance
• Revenue-based business loans
• SBA loans
• Working capital loans
• ERC advance

Cost of Debt Formula – Final Thoughts

Knowing your coat of debt is like having a compass in a dense forest—it guides your financial decisions and helps you navigate the terrain of borrowing. Monitor your debt cost to avoid financial pitfalls and make informed choices.

Now that you have this knowledge, review your current financial situation and see how you can apply these insights. Maybe it’s time to reevaluate your borrowing strategies or seek ways to reduce your debt.

Contact us if you have more questions about the cost of debt formula or if you want to apply for a small business loan. Our alternative funding experts can help you find the best loan options for your debt structure.

The post Cost of Debt Formula: How to Calculate and Reduce Your Debt appeared first on Profunding Options.

A merchant cash advance is a business sales-based financing product where a small business receives an advance of funds that it repays, plus interest, with a percentage of its future credit card sales. Merchant cash advances are sometimes referred to as “Credit Card Factoring” or “Credit Card Processing Loan.” The term is also often abbreviated as MCA.

MCAs often carry some of the lowest credit approval requirements of any small business financing option. Merchant cash advance companies typically work with borrowers with bad credit and younger businesses. MCAs enable businesses to secure funding without requiring collateral.

Small businesses also benefit from fast funding with a business cash advance. Most MCA companies can send the advance within 1-3 business days after approval. MCA repayment is tied to your revenue, allowing for flexible payments.

The main caveat of approval for an MCA is having the card sales to support repayment. A merchant cash advance offers the following:

• Advance amounts: $5k – $5 million
• Factor rates: Starting at 1% to 6% per month
• Term: 3-24 months
• Speed: 1-2 Business days

How do Merchant Cash Advances work?

Receiving a business cash advance typically involves working with a financial institution, often referred to as a merchant cash advance company. The MCA company issues the advance, sets your rates and fees, and collects payment from your card sales when you batch out.

While you can typically get approved with bad credit, your credit profile does impact your costs. Lower-credit borrowers usually have higher rates and fees, as well as shorter repayment terms.

Let’s look at the components of a merchant cash advance.

Advance Amount

The advance amount you receive depends on your average monthly credit card transactions. Your credit and debit card sales are the primary determining factor for approval.

This is why it’s called an advance – the amount you receive is an advance of projected future card sales. Most MCA companies base the amount on a monthly average of sales, but some may use weekly or quarterly sales averages instead.

Factor Rate

MCA companies use a factor rate instead of an interest rate. Factor rates can be equivalent to anywhere from a 40% to 150% APR.

The factor rate is a fixed percentage you repay. Factor rates range from 1.09 to 1.50. Multiply the factor rate by the advance amount to determine your interest.

For example, if you borrowed $100,000 at a factor rate of 1.2, the formula would be:

$100,000 x 1.2 = $120,000.

You’d pay $20,000 in interest for borrowing $100,000.

Holdback Rate

The holdback rate is the percentage of your future sales that get withheld and sent to the MCA company for repayment. Holdback rates typically range from 8% to 15%.

Most MCAs have daily payments, but some companies offer weekly repayment. Because repayment is tied to your sales, the amount you pay fluctuates in proportion to your sales.

Terms

MCAs are short-term financing, which is typically repaid within 18 months. Some short-term financing options last up to 24 months. Payments for merchant cash advances generally are deducted automatically from daily or weekly sales.

What are the best Merchant Cash Advance Companies?

MCAs are an expensive way to borrow money, and minimizing your costs requires working with a reputable merchant advance company. Unfortunately, some MCA providers use predatory lending practices that could cost your company.

Best business practices suggest conducting your own due diligence when considering this alternative form of business funding. Ensure that any MCA agreement aligns with your business needs.

Here is our list of the top merchant advance companies.

Forward Financing

Forward Financing is a fintech company that helps small businesses obtain working capital. Its MCA offers amounts between $5,000 and $300,000 with terms ranging from 3 to 12 months.

Borrowers can get approved and funded within 24-48 hours. You’ll need a credit score of 500, one year in business, and monthly revenue of $10,000 to qualify. Forward Financing is based in Massachusetts.

Credibly

Credibly offers merchant cash advances with a maximum funding amount of up to $600,000. The online lender provides a suite of business financing products.

The lender’s factor rates fall anywhere from 1.09 to 1.41. The company also charges a 2.5% origination fee and a $50/month administration fee.

Small business owners need a credit score of at least 500, to be in business for at least six months, and to have a monthly revenue of at least $15,000 to qualify. Credibly can approve applications in as little as 4 hours and wire the advance within 24-48 hours. Credibly is based in Michigan.

Rapid Finance

Rapid Finance is an online lender specializing in lightning-fast funding. The company offers MCA with amounts ranging from $ 5,000 to $500,000.

Rapid Finance MCA factor rates start at 1.22. You need a credit score of 550, three months in business, and $5k in monthly revenue to qualify.

The company offers a quick and easy application process with minimal documentation requirements. If approved, you can get your funds in as little as 24 hours. Rapid Finance’s headquarters are in Maryland.

CAN Capital

Launched in 1998, CAN Capital is one of the originators of MCAs. Small business owners can receive an advance of between $ 2,500 and $250,000.

Instead of an origination fee, CAN Capital charges a $595 administrative fee for its MCA product. The company offers a simple online application.

CAN Capital does not set a minimum personal credit score for MCAs. You will need to have been in business for six months and have $ 150,000 in annual revenue. CAN Capital is based in Georgia.

Reliant Funding

Reliant Funding is a San Diego-based alternative lender, offering a primary financing product, a business cash advance. Advance amounts range from $5k-$400k.

Sometimes, it’s possible to get same-day funding, but it usually takes 1-3 business days. Reliant Funding’s factor rates range from 1.10 to 1.40.

Its MCA product also includes an origination fee, but the company doesn’t disclose the fee range. To qualify, you must have been in business for at least six months, have an annual revenue of $60,000, and a minimum credit score of 525. Reliant Funding’s headquarters are in California.

Platform-Specific MCAs

Some payment processors and eCommerce platforms offer business financing products to merchants who use their services. You may be eligible for exclusive perks and discounts if you process payments using one of the following methods.

PayPal Working Capital is a financing product that operates like a merchant cash advance. Consider this product if your business processes payments using PayPal.

Shopify is one of the world’s leading e-commerce platforms. Shopify Capital is an invite-only financing product for qualified customers.

Using Square payment processors might make you eligible for Square Business Loans, which operate like a business cash advance. Like Shopify, this program is invite-only, so the company will notify you when you’re eligible.

Stripe is another one of the big three payment processors, along with PayPal and Square. It was the last of the three to offer business financing to its customers. The Stripe Capital application is by invitation only, so you’ll be notified if and when you’re eligible.

eCommerce platforms also offer merchant funding programs for their sellers. Amazon Lending is an invite-only merchant funding program for Amazon sellers. eBay Seller Capital also provides merchant funders to sellers on its platform.

How do I qualify for a Merchant Cash Advance?

One of the primary benefits of an MCA is that it has the easiest qualifications of any business lending product. Each lender sets different minimums, but your average credit and debit card sales are the most crucial factor. Many merchant cash advance providers require businesses to have been in operation for at least six months before they can be considered for an application.

A business must typically accept credit card payments to qualify for a merchant cash advance. However, some modern merchant cash advance options take repayment from all sources of revenue, placing less of an emphasis on credit card sales.

Most approved businesses we work with here at PFO meet the following minimums:

• Annual revenue: 120k+
• Credit score: 550+
• Time in business: 4+ months

How to apply for a Merchant Cash Advance:

You can borrow up to $1 million, with terms of up to 24 months. Here’s how to apply:

Step 1: Consider Your Needs

Take time to ensure this is the right product for your needs and circumstances. Will you be able to utilize the capital to achieve your goals? Will the repayment structure do more good than harm to your operating capital? Do you know exactly how much funding to request? Answering these questions ahead of time will make the rest of this process much easier.

Step 2: Gather Your Documents

The application requires the following documents and information:

• Driver’s license
• Voided business check from your business checking account.
• Business bank statements from the past three months
• Credit card processing statements from the past three months

Step 3: Complete the Application

You can begin the application process by calling us or filling out our one-page online application. Enter the information from the previous section along with your desired funding amount.

Step 4: Speak to a Representative

After applying, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This will ensure that there are no surprises or hidden fees during the repayment period.

Step 5: Receive Approval

The process generally takes a few business days. The cash should appear in your checking account in 1-2 business days after approval.

What are the advantages of a Merchant Cash Advance?

MCAs are designed to help small business owners who may not have sufficient credit, a long history in business, or consistent cash flow, making it difficult for them to qualify for traditional business loans. Merchant cash advance companies often consider the overall health of a business, not just credit scores, when evaluating applications. Few business financing products are easier to qualify for than an MCA.

The primary benefit of business cash advances is the speed of funding. Most MCA companies offer convenient online applications with minimal documentation requirements. You can typically complete an application in minutes and receive approval on the same day or within 24 hours.

After approval, business cash advance lenders can wire transfer the advance to your business bank account in 24-48 hours. All told, you can apply, get approved, and receive your money in 1-3 business days.

Instead of having to pay the same amount every month like a traditional loan, your repayment fluctuates with your card sales. Slow months result in a lower total payment.

The repayment structure is particularly beneficial for seasonal businesses or companies that experience occasional downturns. Theoretically, you could spend the funds to cover operating expenses during the offseason and repay the MCA as revenue increases during peak season.

What are the disadvantages of a Merchant Cash Advance?

The lowered qualifications, quick application process, and fast funding times come at a cost. Business cash advances carry some of the highest costs of any business lending product.

You’re also more likely to get a higher factor rate and shorter repayment terms with a lower credit score. The combination of high costs and short repayment terms results in frequent, high payments that can significantly strain your operating capital.

With a factor rate, you get a flat interest applied to the loan regardless of when you pay it off. Unlike business loans with amortization schedules, you won’t save interest by paying the debt early.

MCA Pros and Cons

Here’s a summary of the benefits and drawbacks of business cash advances.

Pros:

• Quick & easy application process with fast approval times.
• Low credit scores are accepted.
• You can get approved with less than a year in business.
• Fast funding times, as soon as 1-3 business days.
• No fixed monthly payments – fluctuates with your card sales.

Cons:

• Higher rates & fees than most small business loans.
• A shorter repayment term & high payments could impact cash flow.
• You may have to change your merchant services provider.

Frequently Asked Questions

Here are the most common questions about merchant cash advance companies.

Is a Merchant Cash Advance worth it?

Every business owner should carefully weigh the costs of an MCA against its intended benefits. In certain situations, the increased expense of a business cash advance may be worthwhile. Most businesses that qualify for merchant cash advances need to process credit card payments.

If you expect an increase in card sales, you could rapidly repay the advance with a lower impact on your operating capital. For example, let’s say you run a seasonal business that requires purchasing large quantities of inventory to prepare for the busy season.

You use the MCA funds to stock up, and once your card sales increase, you’re repaying the advance while maintaining a healthy cash flow. In this case, the financing costs associated with acquiring the necessary inventory are justified.

In addition, an MCA is not technically a “loan” and doesn’t show up as a “liability” or “debt” on your balance sheet. Sometimes, having too many liabilities and accumulating additional business debt can negatively impact your credit, making it more challenging to obtain credit from vendors.

Can I get a Merchant Cash Advance with bad credit?

Yes, one of the most significant advantages of MCAs is that you can typically qualify with a lower credit score. Some MCA companies don’t require a minimum credit score.

However, you should know that a lower credit score typically means a higher interest rate. In general, one way to think of MCAs and bad credit business loans is as a form of bridge financing.

You can use the MCA to obtain short-term funding while building or repairing your credit. With a higher credit score and a more established business history, you should be able to qualify for lower-cost financing.

Businesses must accept credit and debit card payments to qualify for a merchant cash advance. Both business and personal financial documentation may be required during the funding application process. Typically, three months of bank statements are required for the merchant cash advance application process. Some lenders may approve a merchant cash advance without requiring bank statements, but they may expect higher interest rates.

How long does it take to repay a Merchant Cash Advance?

Merchant cash advances are short-term financing options that are typically repaid within 3 to 18 months. However, your repayment depends on your card sales. The more card sales you make, the faster you repay the advance.

What are the risks of Merchant Cash Advances?

There is an ongoing concern that MCAs can lead to a cycle of debt due to aggressive collection practices and high costs. Recent legal actions have exposed predatory practices in the merchant cash advance industry.

MCA providers typically avoid regulations governing traditional loans by relying on the differences between MCAs and loans. MCA agreements lack the protection of usury laws because they are structured as purchases of future receivables rather than traditional loans.

States like New York and California are implementing regulations specifically targeting merchant cash advances due to rising concerns over predatory lending.

The New York Attorney General secured over $1 billion in judgment against Yellowstone Capital for misleading loans represented as merchant cash advances. Founded in 2009, Yellowstone Capital faced legal issues for providing predatory loans disguised as merchant cash advances. The judgment against Yellowstone Capital includes the cancellation of over $534 million in debts owed by small businesses under predatory terms.

What are my alternatives to Merchant Cash Advances?

Business cash advances are not suitable for every company or situation. For example, not every business processes a high volume of monthly credit card sales.

A revenue based business loan is similar to an MCA, except that the borrowing amount and repayment are derived from all revenue sources. The terms, rates, and qualifications are generally similar.

More established businesses with fair to good credit and consistent revenue can qualify for more advantageous financing options. Here are some other small business loans to consider:

• Business term loans: With a business term loan, you receive a lump sum of capital upfront and repay it over a set period with fixed or variable interest.
• Equipment Financing: Equipment financing allows you to purchase or lease equipment by using the equipment itself as collateral for the loan, which is typically repaid through fixed payments.
• SBA loans: SBA loans are government-backed business loans that offer competitive rates and long repayment terms to qualifying small businesses.
• Accounts receivable factoring: Accounts receivable factoring provides immediate working capital by selling your unpaid customer invoices to a third-party factoring company.
• Business lines of credit: A business line of credit gives you flexible access to funds up to a set credit limit, letting you borrow only what you need and repay as you go.

Merchant Cash Advance Companies – Final Thoughts

An MCA can help your business with working capital, but it’s essential to understand all the associated costs. MCAs carry higher costs than most loans.

Businesses that aren’t careful could get trapped in a cycle of debt that’s difficult to escape. You should take every measure to minimize costs and plan for the expense.

One of the best ways to do this is to look for a merchant cash advance provider that is transparent with its costs and fees. It will be easier to budget for the repayment with accurate costs.

Contact us to learn more about merchant cash advance companies or to apply for a small business loan. Our loan executives can help you find the best financing product for your goals.

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