What are Revenue Based Loans?
In short, revenue based loans are debt financing that’s an advance or percentage of your past cash flow. For the sake of this article I am focusing on merchant cash advances and ACH loans. A merchant cash advance is an advance of your most recent credit card sales. When applying for a merchant cash advance, a financial institution (i.e. lenders) will ask to see the last 6 or 12 months of your business credit card statements. The amount lenders will approve depend on the average monthly amount of your credit card sales.
An ACH loan is a short-term loan that is based on your business checking account deposits. For ACH loans, lenders will ask to see the last 6 or 12 months of business checking account statements. The amount lenders will approve depend on the average monthly amount of your business checking account deposits.
Are Revenue Based Loans More Expensive Than Traditional Small Business Loans?
Merchant cash advances and ACH loans can be considered expensive in comparison to traditional small business loans. Traditional small business loans can have interest rates of 6% to 13% (on average) and terms for up to 6 years (or more). Merchant cash advances and ACH loans are short-term financing. The interest rates (or cost of financing) can add up to 45% annually for these types of revenue based loans.
Merchant cash advances and ACH loans are more expensive for several reasons. They are designed to meet the working capital needs of small business owners who have bad credit (or less than perfect credit). They are also designed for companies that have consistent cash flow but struggle to obtain capital via a traditional financial institution. In many cases, you also don’t have to pledge any of your physical assets as collateral to obtain a merchant cash advance or ACH loan.
How Are Revenue Loans Paid Back?
Besides being expensive, revenue based loans such as merchant cash advances and ACH loans have to be repaid very quickly. Repayment begins within 30 days of the initial disbursement date of the advance or loan. The maximum term for most merchant cash advances and ACH loans is 12 months. However, some lenders offer revenue based loan programs with a 36 month term. The lenders who offer merchant cash advances or ACH loans will require you to make daily, weekly or monthly payments to pay off the advance or loan. Lenders usually require daily or weekly payments for this type of business financing. With merchant cash advances, lenders will take a percentage of your daily credit card sale to pay back the advance. With ACH loans, lenders will debit a set amount from your business checking amount daily, weekly or monthly.