Common costs, rates and fees associated with a merchant cash advance
A merchant cash advance is a fantastic thing for all small businesses to take advantage of. Small businesses are the foundation on which the rest of an economy can be built, and every penny counts when it comes to helping a small business grow. The issue is that, as with any loan, you need to be aware of the costs and fees that you might have to pay as a part of your loan.
Understanding common merchant cash advance costs is key to finding the right deal for you so you can make a more informed decision.
- How much will a merchant cash advance cost?
- Fees charged when applying for a merchant cash advance
- Arrangement/booking/completion/processing fee
- Broker fee
- Bank/wire transfer fee
- Factor rate
- Origination/processing fee
- Late payment fees
- Returned fee payment
- Merchant cash advance fees & costs roundup
How much will a merchant cash advance cost?
When browsing loans, the majority of people make their decision based on several factors which determine the loan’s “cost”. This can be the interest/factor rate, the type of loan, the length of the repayment terms, and the total amount payable, to name just a few.
Those are all important factors, and you shouldn’t ignore them. However, the oft-forgotten element of a loan’s cost is the fees payable as a part of the process. As a part of the browsing process, you should make sure that you consider the merchant cash advance fees you’ll be liable to pay. They should be clearly indicated, however, some lenders like to muddy the waters with awkward terminology, so it’s easy to get lost.
Fees charged when applying for a merchant cash advance
Knowing the common fees you might encounter when applying for a merchant cash advance will help you make sure you understand what you’ll be liable to pay. It’s most helpful to know this before you apply.
This can be broadly grouped under the term “administration fee” – which should give you a clearer understanding of its purpose. It’s a fee designed to offset the costs of processing your application. They can mount up when you consider electricity, human resources, computer equipment, hosting for online applications – the administration fee will generally contribute to that.
It’s generally paid upfront, however, some lenders may choose to make it a part of your loan so you don’t have to front the cost directly. The actual amount you’ll pay will vary depending on the size of the loan you’re applying for, how detailed the application process is, and the size of the lender. If you don’t see an arrangement/booking/processing/completion fee advertised, be sure to enquire before you apply.
A broker works by taking one application from you and presenting it to multiple financial partners. They will process your details and reply with an offer – allowing you to choose the best deal for you. The broker may require a fee to cover their administration and effort in presenting your application to a number of different lenders. If they charge, you’ll be paying the fee directly to your broker.
The rate can vary from tens to thousands of pounds, depending on the loan in question. The payment can either be paid as a part of your loan, or you can pay the broker independently – paying independently will likely be the cheaper option. If the fee becomes a part of your loan, depending on its size, it could increase the interest you’re paying.
Bank/wire transfer fee
When you transfer money there will generally be a fee associated with it – lenders transfer money into your account, which may mean they incur a fee for doing so. Naturally, that fee will have to be covered by you. It isn’t much, and if you’re only taking out one loan you should only have to pay it once. However, the fee will be applicable each time money is moved from one account to another.
It varies depending on the size of money being transferred, but a general ballpark would be the £10-£25 figure. If you’re unsure, make sure to ask your lender about transfer fees before you apply. The fee can usually either be paid outright, if applicable, or made a part of the loan. As the fee is never going to be that much money, both options are sound, it depends on what suits your circumstances.
A factor rate relates to how much money you’re ultimately paying back and is often displayed in the form of a decimal figure – often between 1.1 and 1.5. So, for example, if your factor rate is 1.4 on a loan of £10,000 over twelve months, you’ll actually pay back £14,000. You’ll most often find factor rates applied to short term, unsecured business loans.
It’s important to know that a factor rate is different from an interest rate. A factor rate will be determined once at the start of the loan, and will then be fixed. An interest rate is malleable, and will often be recalculated multiple times through your repayment term as the ultimate amount you owe is brought down. Make sure to ask your loan provider if you’re unsure.
An origination fee is essentially the profit that the lender makes from providing you with their services. It’s often anything from 0.5 – 5% of the total loan amount, depending on the lender. It’s also affected by the size of the loan that you’re taking out – a larger loan can mean a larger initial fee; however, this can often be negotiated down if the loan is large enough.
It’s unlikely you’ll ever pay an origination fee “up front”, it will be added on to your loan so the payment shouldn’t make the loan much more expensive. Your lender should make these fees clearly visible from the early stages of the application process – if you begin to apply and do not see any information about origination fees, make sure to ask before continuing your application.
Late payment fees
As the name implies, these are fees you’ll be liable to pay if you make a payment late. They can be fixed; however, many lenders will have gradually increasing fees as more payments are made late. They will often be added on to the loan, either on the next repayment or to the ultimate loan amount. The best way to avoid them is to ensure you always make your payments on time
Returned fee payment
A returned fee payment arises when a payment “bounces”. So, if you try to make a loan repayment but you don’t actually have the money in your account to cover the cost, the payment will be returned. The attempted payment will still incur charges, however. A returned fee payment can often coincide with a late payment if you end up paying later than the date on your agreement.
Merchant cash advance fees & costs roundup
Merchant cash advance fees can be confusing – all you need to remember is that if you’re ever unsure of anything, ask your loan provider before you continue with an application. Never take out a loan without having a full breakdown and completely understanding the fees you will be liable to pay.
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