Unique Original Articles » The Truth About Cash Advances

So what is the truth about a cash advance?

The truth is that a cash advance is different (that's usually the indirect word for what we are really thinking). Well many merchants think it is cost a lot! That is the perception of the average business owner. But is it really expensive? The fact is the term "expensive" is relative. Allow me to illustrate my point. Do you realize that some of the largest companies in the world (i.e. GM & NYT, etc.) have paid double-digit interest rates for cash loans? And these are companies with excellent credit ratings. You are probably asking yourself why would they do that. The reason is they have calculated the benefit of taking the money to their company.

As a business owner, you have multiple concerns. However, one of the most significant of those is your ROI (return on investment). Said another way, it can be phrased as, ‘how much money can my money make me’? I have worked as a financial professional and therefore understand the importance of a business owner’s need to evaluate the business in terms of the return it produces. Therefore, in order to determine whether or not a business loan is a good choice it should be evaluated on its financial merits. However, in order to do that you need to understand this type of financing and how to analyze it.

A common error made by most merchants is attempting to analyze the cost in terms that a conventional "loan" would be measured. The same rules do not apply to a cash advance that apply to a conventional business loan because the "risk" associated with each are different. For the most part when it comes to a cash advance, the merchant faces very littlerisk. That’s true because it is the the most relaxed option for) business cash. Therefore it cost a little more to obtain it.

How do you factor in the risk?

There are financial equations for measuring the risk. The risk factor is refered to as ‘beta’ and there are factor tables associated with cash advances. That is how funding companies determine how much to charge for the cash. This is similar to the way insurance companies calculate premiums.

How to measure the benefit?

Here is a simple method for evaluating business cash. If you’re paying 30% over 6 months, then you could say that’s 5% (30/6) per month. If the issue you are addressing cost more than that or if will produce a return higher than that in the long run, it’s worth taking the funds. For thousands of merchants a cash advances is a great option for getting working capital.


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