If your business is in need of quick working capital you may find yourself applying for a Merchant Cash Advance (MCA). During the quick application process, you will come across the term “factor rate“.  Here is everything you need to know about a factor rate and how this crucial figure is calculated.

Firstly what is a Merchant Cash Advance?

A Merchant Cash Advance, also known as Merchant Financing, is a short-term loan that is paid back using an agreed percentage of daily card sales. It works via the business’ EFTPOS working in line with turnover instead of being paid back as a fixed percentage at month-end.

What’s the difference between a factor rate and an interest rate?

An interest rate is expressed in percentages, but a factor rate is expressed as a decimal figure. It usually ranges from about 1.1 to 1.5 and will show you exactly how much you will be paying back.

Further to this, factor rates are determined once and upfront based on the loan amount. Whereas interest rates are determined multiple times and are worked against factors like depreciating capital. This means that an MCA can work out to be more pricey as the interest is worked into the total amount, at the beginning of the process. Whereas a normal interest rate means the loan repayments reduce as the loan is slowly paid off. This is because the interest is being worked out against the overall amount owing.

How does a factor rate work?

A factor rate is calculated according to various factors. It is determined by the industry you’re in, according to how long you have been in business, your card turnover and stability of sales.

How do I calculate my factor rate?

You’ll need to calculate the total amount you need to repay in order to find the factor rate. Multiply the amount you need to borrow by the factor rate. So for example, if you are borrowing $150,000 and the factor rate is 1.2 for a 12-month term, you’ll need to repay a total of $180,000.

How do lenders determine the factor rate?

Credit card statements:

The lender will first want to see a 6-month history of EFTPOS statements. This is used to understand how stable your card sales are and to get a sense of business history.

Business bank statements:

You will likely need to present at least 3 months of bank statements to determine the overall health of your business.

Time in business:

Most lenders will need you to have been in business for at least six months to one year before providing a loan.

Tax return & financial statements:

Some lenders will also want to see your latest business tax return for larger loans, in order to understand how your business shaped up in the last financial year.

But that’s pretty much it. The beauty of the Merchant Financing process is that after submitting just these few documents, you can obtain finance in 48 hours. And for some businesses, this can be an absolute game changer.

What does this mean for my business?

An MCA means that on a good sales day you will pay off a higher percentage of the overall loan, thereby paying off the total that much quicker. Similarly, on slower days, the amount, being a percentage of daily card sales will then reduce. Some merchants, for example, those in a seasonal trade, love this aspect of the MCA. But short-term finance is not for everyone. That said it can often be a lifeline for businesses. It is best used for quick growth-enhancing projects like renovations or equipment upgrades. Whereas a traditional loan is better for very large long-term projects. Both options have their up and downsides. The MCA comes with speedy access and flexibility. While a traditional loan with interest comes with a certain amount of predictability.

Don’t be afraid to ask

If at any point in the process you don’t understand a term or a concept, don’t be afraid to ask. A responsible lender will be ready and willing to answer your questions. They will empower you through the process and explain exactly what everything means in dollars and cents.

For more on how to finance your business with a Merchant Cash Advance, speak with a Beyond Merchant Capital lending specialist today.

Speak with a lending specialist today about funding the growth of your business.


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