There are plenty of good things about a cash advance… and a few bad ones. Below are the key things you need to know before obtaining a cash advance.
- Fixed Fee (also called the Buy Rate or Factor Rate): This number is how much you’ll eventually have to pay back. Generally it’s written with a decimal point (ex: 1.30), but you might also see it as a percentage (30%). The math is pretty simple: you get the number you’ll have to pay back by multiplying the cost of your advance with the fixed fee. For example, on a $1,000 loan, with a factor rate of 1.3, you’d wind up paying $1,300 back to the provider.
Withholding Rate (also called Withholding Limit or Hold Back Rate): This number determines how much the advance provider will siphon off your income after every sale or every day. Some providers will work with your payment processor and only take money off of debit and credit card sales, others will ask for access to your bank account and take off their percentage of your income at the end of every day.
Like the factor rate, this number can vary quite a bit depending upon how soon the provider wants their money back, and how much of a reduced profit your business can operate under. Some providers will go as low as 3%, but more likely you’re looking at a number between 10% and 50%, with an average of 25%.
Term Length: Simply, how long the provider thinks it will take you to pay back the loan. These are quick loans: most want the money back within 3 to 12 months. Some will go all the way up to two years, or higher.
ACH Withholding (or ACH Withdrawal): Every day, the provider will receive a copy of the profits, and they will deduct their portion through the business’ checking account via automated clearing house (ACH). This method is great because doesn’t require involving a merchant account provider.