How Difficult is it to Repay?
It is not that difficult to repay a merchant cash advance because they automatically deduct the money from your credit card sales. However, there are some repayment details which you should be aware of. They typically use a factor rate and not an interest rate, like more standard loans. The factor rate runs anywhere from 1.14 to 1.48. You then multiply the amount you borrow by this number and that gives you the full amount that you owe. It may seem like a low number when interest rates typically start around 8 percent, but not so fast. When you translate this number to a percent, it ends up being around 15 percent but can go much higher. However, the typical borrower ends up paying 20 to 40 percent more than the amount borrowed.
The merchant understands that when you are wanting a cash advance, you are probably more of a risk. Naturally, they want to make sure they protect themselves from that risk. It usually takes about 8 to 9 months to fully pay off your merchant cash advance. However, you may be able to get a term as short as 4 months and as long as 18 months depending on how much you earn. You should also keep in mind that this limits the amount of cash that you have coming into the business while you are repaying this cash advance.
The amount you pay back daily is called the holdback amount. This is a daily percentage of the credit card sales receipts. This is not the same percentage as your repayment amount, or factor rate. The holdback amount is based on the amount of money you are advanced, the amount of your credit card sales, and the amount of time you take to repay the advance.