Written By Heath Wruble
Short Term Funding Options
Merchant Cash Advances (MCAs) are a short-term advance which is paid back as a percentage of revenue typically in the form of your bank or credit card processing daily receivables, basically the sponsor (the bank or financing company providing your business the funding) will purchase at a discount revenue received into your bank account or through your credit card processing machine. This means for every credit card transaction you ring up daily, a percentage goes to paying back your loan. As an example, a business needs $100,000 in a short-term loan, the MCA will advance you $100,000 at a 1.2 factor rate and a 15% split, this means that you are required to pay the lender $120,000 (the advance plus interest) within the 18-month period, in order to do that they will take 15% of your credit card sales daily. As a side note this type of funding is NOT a loan but a sale of your future receivables.
Line of Credit is a credit facility extended by a provider to a business which enables the business to draw on the facility when funds are needed, typically, a business is required to provide to the facilitator that the business has been active for at least a year, a credit score above 600, with an active revenue stream.
Receivable Financing is a way to fund your business by pledging your receivables as collateral. It basically breaks down to this, you send out invoices which you sent to your customers, they have an obligation to pay you for the products sold to them and invoiced, as a business owner you sell the right to the receivable for an upfront loan. As an example, you are company XYZ and sold widgets to the ABC company, you send the widgets to ABC with an invoice for $10,000, ABC has an obligation to pay that invoice within a 60-day period. While you wait for the money, you need funds to continue to operate, you sell the rights to the invoice at 80% meaning that you receive $8,000 from the funding company, in 60 days ABC send $10,000 to you which is then transferred to the funding sponsors, thus they made a $2,000 profit in 60 days. This is a simple rendering of the transaction; in most cases the funding firm will not take the entire $2,000 profit but you should get the idea of the overall process. Another option is Invoice Factoring, which is the same concept as receivable financing, except rather than pledging the receivables as collateral, you sell the invoices and the sponsor, and they collect the receivables.
ABL Credit Lines, is an asset-based lending funding option, but is lender and industry specific. You own a dry cleaner and need a new pressing machine, it’s an asset and is worth $50,000, you obtain a loan to purchase the asset, the lender holds a lien on that equipment, if you are not able to make the appropriate payments the lender will be able take possession of the equipment or if you try and sell your business the lien on the asset will be recordable to the purchaser and it may complicate the process.
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