Cash advances can be a very useful solution for your businesses’ short-term needs and investments. However, picking the best repayment strategy for your advance is vital in making sure that your business will not be affected more than it would take advantage of those funds.
As we touched on in our previous article, cash advance companies, also known popularly as MCAs or cash shops, represent an important backbone of America’s current small business industry. With more than $19 billion funded each year, merchant cash advance companies do not offer usual loans, but rather offer a lump sum payment in exchange for a fixed percentage or your future sales and credit card income. This can turn out to be the best on-hand problem solver whenever you have an issue you need to deal with quickly and effectively. They can also be a good investment point for when your business is ready to grow and extend. However, because cash advances are easily accessible online and bear low qualifications for approval, they also pose a great risk of contributing to financial hardship, due to the fact that cash advances are designed to take a percentage of your future receivables. We will go into details on how to identify if your business is in a financial hardship in a future article, so stay tuned for that as well. However, with a little bit of research and by clear identification of what your businesses’ needs are, you can opt towards a repayment frequency that would help safeguard you from eventual hardship.
WHAT ARE MY REPAYMENT STRATEGIES OPTIONS?
Firstly, let’s go briefly over the repayment strategies often used by MCAs. The most popular one is the daily repayment. Being a sale of future receivables, MCAs typically stipulate in their agreement a fixed amount that they will be taken out of your bank account daily. The benefit of this repayment frequency is the fact that the amount might not be as big as opposed to other frequencies (i.e weekly or monthly), so it might not seem to affect your cash flow that much. However, studies on the matter show that this is actually the most harmful repayment frequency that you could opt for. Because your bank account is being drafted on a daily basis, it becomes much more difficult for your business to sustain its cash flow and build up funds in its bank account, so that you can invest back into stock, vendor payments or utilities. Basically, the daily payments will constantly eat up your generated revenue, which becomes an ever bigger issue for those situations in which your business has not been able to generate any cash flow in a specific day or period of time, meaning that the daily payments will start coming out of your profits. Another disadvantage of this frequency can be seen in situations where you can no longer sustain them, and you are left with no choice but to default on the payments. As an ACH (Automated Clearing House) transaction, the bank will ultimately charge you for not being able to cover these payments. These insufficient funds fees, which are also called Overdraft or NSF fees, can add up. As a daily charge, these fees will build up in your bank account and will become an additional expense that you’ll need to cover.
Another option would be the weekly payment. As opposed to daily payments, this option usually carries higher installment amounts, but at a lower frequency. One of the benefits of this weekly repayments is that in most of the cases you can choose the day you want to be drafted. Therefore, if you know your business is usually cashing in more money at the beginning or the end of a week, you can ask the creditor to draft you accordingly. Even though it’s a higher amount, not being charged daily gives you time to make sure that the money is in the account and that your business is able to sustain these payments. As opposed to the daily frequency, there is a slightly smaller chance of defaulting. However, should your business struggle with paying these as well, the NSF fees occurred due to defaulting might not charge your bank account as much as in the daily payments scenarios, but they can still add up over time. Regardless of the amount of the draft you were unable to cover, the NSF fee has the same fixed amount. So while you cannot avoid it, it’s good to make sure it’s less frequent. Additionally, many weekly drafting creditors will tack on higher fees for missed payments, resulting in an increase in the total amount you owe.
One of the not-so-common payment frequencies in the MCA space is the semi-monthly or bi-weekly payment. Depending on the creditor, they can either define this frequency as 2 payments per month, on fixed dates (i.e 15th and 30th of each month) or they can define it as a payment every 2 weeks, which will mean 2 payments for 4 week-months and 3 payments for 5 week-months. This frequency is not very popular among creditors, as their primary interest is to get their money back as fast and conveniently as possible. Therefore, you might find that not a lot of cash shops will offer this option. However, considering your businesses’ interests, the lower the frequency, the more your cash flow has room to grow and sustain your expenses. This, of course, means that the payment amount will be even higher compared to the weekly or daily frequencies, however you will still end up paying the same total repayment amount.
Least, but not last is the monthly payment. This repayment amount is most popular among credit cards or line of credits, however there are also some cash advance companies that will agree to it as well. A monthly payment can be set up on any day of the month, depending on when your business is most financially stable. Of course, this frequency carries the highest draft amount that you will find, but it is also the most sustainable option. In our experience so far, we have noticed that clients that pay monthly have much lower chances of defaulting on their payments than the ones that pay daily or even weekly. Once again, in case of a default, monthly payment help you the most in not accruing extensive NSF fees in your bank account. Also, in case your business does not have all the funds to cover it, it is much easier to reschedule it with the creditor or make at least a partial payment.
HOW DO I IDENTIFY THE BEST OPTION FOR ME?
There are many aspects to take into consideration when choosing a repayment frequency. Firstly, you need to have good knowledge of your businesses’ financial situation over the last 3 months. Knowing how your performance has been will help estimate how the future months might present themselves in terms of profits and generated revenue. Of course, this is no certainty, but it can help to have an understanding of your historical performance when making a decision.
Another important aspect to consider is the amount that you want to take out. Depending on your needs, you might need just a small amount for urgent needs, or you might need more for longer-term plans. You need to take in consideration that the higher the borrowed amount, the bigger the repayment will be as well. Therefore, depending on how you estimate your business will perform in the future period, you need to weigh in if a smaller and more frequent amount, like a daily payment, would benefit you more than a higher monthly payment. At the end of the day, the advance will be repaid in the same amount of time, it will just depend on how often your business is able to make the payments back.
One of the most important aspects is the type of business you conduct and how often you generate revenue. Should your business be seasonal, you need to weigh in the fact that your creditor will charge you even when you are not able to properly operate and generate revenue. Therefore, it is highly important to prioritize building profit during your most profitable months, so that you can make sure your payments are covered even in the months where you’re operating at a minimum or not at all. However, should you be in the impossibility of making the payments, a daily NSF fee will affect you much more than a monthly one and it will be much harder to make up for all that profit loss.
If your business is not seasonal, but gets paid every 30 to 90 days, it is essential to make sure that your cash advance payments are scheduled according to the frequency that you get paid. For example, if you opt for a monthly payment at the beginning of the month, but most of your jobs are paid at the middle of a month, you are much more likely to not have the funds to cover your payments when they are drafted and risk falling into default. Same goes with the weekly payments, for situations in which you know that most of your work is paid either at the end or beginning of a week. Therefore, coordinating your loan payments to your most profitable days is essential to making sure you commit to the cash advance taken out and do not risk being charged extra by your creditor for not being able to cover the payments.
There is no right or wrong way for everybody when it comes to dealing with cash advances. Even though they are easy to access and can be received quickly, the most important thing to keep in mind is making sure your business benefits in the long term from these funds, and not only for the moment. Choosing the best repayment frequency will be an essential aspect, but we don’t always have this option, especially when we need the funds urgently. Here, at Creditors Relief, providing you the best payment frequency for your cashflow to get back on track is a key aspect of our program, regardless of how urgently you need our help. We customize our services based on your needs and work with you towards making sure your business can start growing a profit again. Therefore, if you’re stuck with a cash advance or debt that you can no longer sustain due to the repayment frequency, make sure to give us a call and ask for our help.
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