Merchant Cash Advance

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One of the primary reasons most businesses fail is a lack of cash flow. It is a critical problem when your business can't keep up with expenses due to a lack of funds. Reducing operational costs won't get you far enough; the best solution is to get funding. A Merchant Cash Advance (MCA) could be the best option to solve your cash flow problem, especially if the bulk of your sales come from credit card users.

What is an MCA (Merchant Cash Advance)?

A merchant cash advance is not to be confused with a business loan. It is a cash advance offered by a merchant cash advance lender to a business that will be repaid by a future percentage of the business's credit card sales daily or weekly.

A merchant cash advance is right for you if you need funding fast and your business does not have the requirements to qualify for conventional business loans from traditional lenders. You should be able to qualify for an MCA once you can prove that your business has high credit card sales.

What Are the Eligibility Criteria for an MCA?

Compared to traditional business loans, the eligibility requirements for a merchant cash advance is straightforward. Your business doesn’t need to have a sterling credit record and the length of time the business has been in operation doesn’t matter as much.

Although each lender has its specific requirements, the basic eligibility requirement for MCA include:

  • Evidence of high credit card transaction volumes
  • The business must be stable and profitable
  • There must be a POS terminal on the business premises
  • The length of time in business may vary depending on the lender.

Your personal and business credit information is less critical when compared to the high volume of credit card transactions your business generates. You also do not need years of business experience to be considered eligible.

The entire loaning process can be done online, making the process easier and faster for every business owner.

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The Pros and Cons of Merchant Cash Advances

Getting enough funding to scale a business properly and increase business operations is one of the frustrations of business owners. Fortunately, merchant cash advances have proven beneficial for business owners, but they don't come without shortcomings. If you are considering signing up for MCA, you should know the pros and cons to make an informed decision.

Here are the pros and cons of MCA:

Pros

  • Quick access to funds
  • Straightforward application process
  • Flexible repayment plan
  • No need for collateral
  • A strong business credit profile is not required

 

Cons

  • High Annual Percentage Rate (APR ranging from 70% to 200%)
  • It does not improve your business credit
  • Applicants must accept credit cards to be eligible

When Should I Apply for a Merchant Cash Advance?

Running your own business comes with lots of ups and down. A merchant cash advance could prove beneficial when you need to ease cash flow challenges but do not qualify for other business loans. A merchant cash advance is ideal if your business has:

  • An urgent need for cash to cover emergency expenses
  • Consistently high credit and debit card transaction volumes
  • Poor or non-existent credit history
  • Minimal experience in that line of business and hence does not qualify for a traditional bank loan
  • no assets to tender as collateral for a conventional business loan
  • Funding needs to bridge working capital deficits
  • Funding needs for expansion and growth

Applying for a Merchant Cash Advance

The main requirement you should have when applying for a Merchant Cash Advance is to have a high volume of credit and debit card transactions monthly.

However, providers need to be sure your cash flow is frequent, so you may be required to maintain a monthly credit card transaction of $3000—$5000. If your cash flow is inconsistent, you might need to consider other business loan options.

Some of the best MCA providers are Credible, Rapid Finance, and National Funding. You can apply online for an MCA by submitting basic information through the lenders' website. You may need to upload documents such as credit card processing statements, business ID, and business tax returns.

You must also ensure that you have enough cash in your merchant account to support the repayment plan, which could be daily or weekly, fixed or flexible.

How Much Do You Want?

$2,500

How Does Repayment for a Merchant Cash Advance Work?

Most merchant cash advance providers have these two types of repayment models:

Percentage credit card deduction

The lender deducts an agreed percentage of each credit card sale as part of the repayment plan. This percentage, also known as a 'holdback', may be deducted daily or weekly until the debt is fully repaid.

The more credit/debit card sales you make, the faster you pay your debt. That means instead of having a fixed term like other business loans, MCAs with a percentage deduction repayment option have flexible terms depending on the credit card sales volume.

Fixed Withdrawal

This repayment model deducts a fixed sum from your business bank account daily, weekly, or monthly as part of the repayment. You must repay the fixed amount based on the repayment plan regardless of your total sales.

The agreed fixed repayment amount is based on your projected monthly revenue. This type of repayment model lets you know the exact date you will fully repay your cash advance.

What Is the Cost of a Merchant Cash Advance?

When considering whether to sign up for a Merchant Cash Advance, you shouldn't ignore the funding fee and the split percentage, as they will determine the amount you are to repay and the length of your repayment term. Some providers charge a fixed fee for the lending fee, while others do not. It is advisable to research your options thoroughly to make a well-informed decision.

Also, instead of interest rates used by traditional banks, MCA uses factor rates, which are based on the lender's background check on your business. These factor rates include years of experience in business, cash flow, credit card sales, and credit score. The higher your factor rates, the more fees you will be charged. Most MCA lenders will charge anywhere from 35% to 200% APR which is more expensive than other business loans.

Administrative and some other miscellaneous fees are not dependent on the factor rate, although they are part of the charges that add to the total cost of the loan.

Loan Alternatives to MCA

Since merchant cash advance requires business owners to have high credit card sales, you can consider other business financing options if you don't meet the requirement. Short-term business loans could be the best option if you have a strong credit profile. You can also consider a small business line of credit which is much more affordable than a merchant cash advance.

Short-term business loans offer daily to weekly repayment terms, depending on the lender, relieving you of the burden of debt servicing. Better than repaying with one large payment in a month.

You may also consider account receivable financing or factoring (discounting your account receivables to get instant cash) depending on your funding needs and business structure.

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