Let's compare the two to determine total cost. When borrowing $50,000
under conventional parameters you may be looking at a seven-year term
(84 monthly installments) at an interest rate of 7%. Monthly installment
payments of $755 for that time period will equal a total of $63,420.
When borrowing capital using a business cash advance a typical factor
rate might be 1.35 with a holdback of 20% and a term of 15 months. This
would equate to a total payback amount of $67,500 over the course the 15
months by holding back 20% of sales each day.
It
is obvious to see that a business cash advance is more expensive than
traditional lending, but approval rates needs to be taken into account
when forming an opinion on this available tool to help a small business
grow. At smaller banks business loans are approved roughly 45% of the
time while at big banks ($10 billion+ in assets) are approving small
business loans at an atrocious sub 10% level. Business Cash Advance
approval rates on the other hand are up near 85%-90%.
Although the
costs are somewhat elevated so too is to the risk to the lending
institution supplying them. Basing a loan on just a few months of sales
data is a dangerous undertaking. This is why the lenders of a business
cash advance take on a more proactive approach when collecting their
money. The borrower will either have to currently be using or change to
one of the lender's approved credit card processing companies. The
lender then is able to automatically withdraw a certain percentage of
the daily credit card sales straight from processing until the business
cash advance is paid off.
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