First, breaking down interest rates and repayment Merchant Cash Advance On average you will see factor rates on MCA’s between 1.25-1.499. For simplicity matter that is 25%-49.99% Interest rate. That may sound like a lot, and it is a lot for the personal consumer who is paid hourly or salary. But for a business owner who is using the capital to invest and reaping 100%-400% returns, then the cost of the capital makes sense as a profit is being made, not to mention the interest rate is a tax write off. Another benefit to this is that the interest is simple unlike a bank with hidden balloon interest who will have you running in place for years until you even begin to touch the principle. That comes out to he more expensive and disadvantageous for the business owner
Let’s take two product examples:
Bank Loan Amount: $200,000 Interest Rate with balloon: 15% APR
Repaument Type: Monthly
Term length: 60 months
Total Payment: $349,175
Interest Paid: 149,175
Merchant Cash Advance amount: $200,000
Interest rate: 30%
Payment type: weekly or Daily
Term Length: 15 months
Total payment: $260,000
Interest Paid: $60,000
10% payment discount
From the two examples shown you will see that although a bank term is longer it is more expensive and less flexible as far as the repayment type is concerned a daily r weekly payment is a better for for small business for book keeping purposes. portunity cost of taking out a MCA loan every year with a preayment discount far outweighs the restrictions that a bank will put on your business not to mention your assets they want to hold at their fingers tips.
Now look at the opportunity cost for taking out a MCA loan every year with a prepayment discount far outweighs the restrictions that a bank will put on your business not to mention your assets will be held at their fingers tips. Ideally speaking you want synergy with a bank loan with a MCA to cover both long and short term expenses, and lastly do not overleverage your cash flow with MCAs that puts your account in quick sand. Use debt responsibility. At VIP Capital Funding, we will advise and put you in the best possible position to succeed. In summary: A Merchant Cash Advance gives you more capital overtime this growing your business faster, no prepayment discount, it can be cheaper in the long run compared to a bank loan, funding process is a lot faster and there is no personal guaranty. The list could go further here but I will stop here.