There are two determinants are; the holdback rate and the factoring rate. These two rates will vary significantly between any two customers depending on the type of business. Pros and Cons of Business Financing
The Holdback Rate
The holdback rate is based on:
- The level of sales a business makes. The MCA provider is usually paid back from the sales made in the future. Therefore, sales are the most critical consideration when calculating the holdback rate to be charged for the advanced amount.
- The length of time it will take to repay the advance
- Size of the MCA. The larger the number of funds advanced corresponds with a higher holdback rate due to the greater risk on the lender.
The Factoring Rate
The factoring rate for MCAs is based on:
- Card Processing Statements – MCA providers will ask to see a consistent history of card sales for your business before they can approve and advance funds. They want to be sure that the funds advanced can be paid back in full and on time.
- Bank Statements – Monthly bank statements are indicative of the financial health of your business since they reveal the cash a business generates. Businesses with a higher net worth will be charged a lower factoring rate.
- Business History – The number of years a business has been in operation is indicative of stability and ability to overcome adverse conditions. MCA providers advance cash to businesses with at least a year of operation in its industry.
- Tax Returns – Tax returns will also point to good financial health since tax is correlated to profits generated for a specific year. The profitable business has lower risk and will be charged a lower factoring rate.
Keep in mind the holdback and factoring rates when seeking to get a merchant cash advance. The factoring rate is markedly different from interest rates and annual percentage rates (APR). The factoring rate is different in that it is excluded from the cost of capital and is neither counted as equity since it not considered a debt to the business.