There may be a time when you need an extra revenue injection to help boost your cash flow, but prefer to repay the loan based on future sales. Such is a scenario where a revenue advance may be the right source of financing for you.
A revenue advance (RA), also known as a merchant cash advance (MCA), is not a loan. Rather, it is lump sum advance that is based on future revenues such as credit card sales. Essentially, you are selling a certain portion of your future revenues in exchange for quick access to capital. Think of this as a pay day loan for businesses.
There are two fundamental repayment structures for an RA:
- Receive a lump sum with the stipulation that the funding institution receives a certain share of your future credit and debit card sales;
- Automatic daily or weekly ACH withdrawals directly from your bank account — at a fixed amount.
Notably, both repayment options come with higher than average fees. Yet, the risk criteria that financial institutions establish for a revenue advance is assessed differently than business lines of credit or business loans. Your daily receivables or credit card receipts are a fundamental metric for the financing decision which includes a risk factor used to calculate the additional fees for the advance. It’s important to keep in mind that interest rates for a revenue advance are generally higher than other funding options.
Though the credit requirements are often less rigorous than a line of credit or loan, a revenue advance can be more costly. Therefore, carefully weighing the cost versus the benefits in securing this type of financing.