Lending Rate

Lending Rate

When a business loan is not available, due to mortgage balance on the business or because it is a high risk business, another option is a merchant cash advance.

There are serious pros and cons to a merchant cash advance, but sometimes it is the only option to pay for extra seasonal merchandise or a facility upgrade.

The biggest negative to the merchant cash advance is the lending rate.

While most business loans have a 2.5% - 7% interest rate, they also have more restrictions as to loan approval and the time frame of the loan.

The lending rates on a merchant cash advance run from around 70% - 350%.

However, the repayment on these rates tends to be a little more flexible. When taking out the cash advance, the terms of repayment are determined and the borrower can choose one of two general options.

The money is paid back a percentage out of each day’s credit card transactions, or it is paid back in a more traditional monthly payment.

The second option, while more traditional, is less flexible, but ensures that the loan will be paid off in a set amount of time.

The first option takes a percentage of the business’s daily transactions and counts it against the total to be repaid. This cuts into the daily revenue, but is more fluid in repayment. It pays more on a good business day and less on a slow day.

Unfortunately, both of these repayment methods will bear the same end payment. The end sum is established with the initiation of the cash advance.

The lending rate will vary depending on several factors: the amount of the loan, the type of business, the length and type of repayment, and the risk level of the business.

While the rates are exponentially higher than a business loan, they do have several advantages. They may be approved within a day and have the money transferred to the business.

This bypasses the prolonged waiting period associated with a traditional business loan. If a business is waiting on that cash influx to move forward, the lending rates may mean less in the long run than the increase in daily revenue.

Also, like all money transactions, a business is allowed shop around to find the most favorable rates for their situation.

Lending rates are just one more variable businesses need to take into account when they are on the road to growing their productivity and revenue.