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What You Need to Know About a Merchant Cash Advance (MCA)

A merchant cash advance is increasingly one of the only alternatives for small businesses seeking funding for working capital.

 According to a report from the National Academy of Sciences, many small businesses have encountered severe financial hardship as a result of the pandemic from 2020. As the effects of the pandemic on small businesses are projected to linger into 2022, small business will continue to face strong headwinds in acquiring working capital. Bank lending has slowed to a trickle and those institutions have very strict lending requirements that most small businesses cannot meet. So, how does your business overcome such ordeals?

Small businesses will need to get creative and be prepared to seek alternative lenders or sources of funding for working capital. Luckily, there’s a way in which you can turn your future credit sales into today’s cash flow. Merchant cash advance lenders can help stabilize your business finances.

In businesses that have a high volume of credit card sales, such as restaurants, a merchant cash advance makes most sense as opposed to a conventional restaurant business loan. Remember, merchant cash advances are paid back from a percentage of future credit card sales. Because restaurants anticipate a higher and consistent cash flow from credit card sales they are more likely to use this type of financing.

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) provides quick business capital based on upcoming credit earnings. An MCA is almost always offered exclusively to companies that do a significant amount of their sales via credit or debit cards. For this reason

Unlike traditional loans, cash advance companies offer your business a lump-sum cash payment in exchange for a portion of future revenue receivables. The cost of the cash advance is almost always expressed as a defined payback figure with an equally well-defined repayment schedule. Repayment amounts are generally drawn from your credit card sales merchant account daily or weekly as defined in your MCA agreement.

For example, let’s say you need to borrow $50,000 to expand your business. The MCA provider will give you a figure (sometimes referred to as a factor rate) that will define your payback amount. Let’s say that figure is 1.3. To arrive at your payback amount using the Factor Rate multiply the amount borrowed ($50,000) times the factor rate (1.3) and the result is the amount you will be required to bay back (65,000).

MCA Factor Rate Example:

Amount of Advance

Factor rate

Payback Amount

$50,000                                x

1.3                                        =

$65,000

The application process is relatively simple compared to conventional loans however, there are usually higher costs associated with an MCA.

How to Apply for Cash Advance

The application process is straightforward. In most cases you will need to provide documentation from your credit card merchant accounts (usually several years of past statements) to give the MCA provider a solid record of sales activity. In addition, you will likely be asked to provide past bank statements for the same multi-year period. Finally, you will need to verify how long your company has been in business.

There may be other requirements from certain providers not covered here, but the three things mentioned here will likely determine your eligibility.

Applying Online

Companies such as New York-based ICapital Funding allow applicants to apply online. Many of the other providers will allow you to start your application online these days. If you have the documentation mentioned above, you can usually get a decision on your loan and amount in just a few hours. Once you have received an online confirmation of your eligibility, it is common for a representative of the company to contact you to review your payback amounts and other terms of the cash advance.

Review Terms of the Agreement Carefully

It is very important before you accept your cash advance to read the terms of your agreement very carefully. A merchant cash advance may seem like easy money, but it’s one of the most expensive ways to acquire working capital and is suitable for businesses that anticipate steady or growing sales.

If you do not understand your agreement, do not sign it until you seek advice or can understand costs and repayment terms.

How Long Does It Take to Get Money From an MCA?

In most cases providers can process the application and disburse funds to your bank account the same day you apply. The time to funding will depend on the completeness of the documentation you provide to the MCA issuer.

Why Merchant Cash Advance Loans?

We’ve discussed the costs and the process of repaying an MCA. Again, read the terms of your agreement carefully and understand the costs. MCA loans can be among the most expensive methods of financing you company.

Once you understand the costs and terms, let’s consider why a business would want MCA funding. Merchant cash advance providers can provide a financial lifeline to your struggling company. In many cases an MCA is the last resort for a business experiencing shortage of cashflow or one that experiences an immediate and unforeseen need for capital. As we mentioned in the outset of this article, most small businesses simply do not qualify for a traditional bank loan.

Some of the Benefits of a Merchant Cash Advance are Outlined Below:

Fast Application, Processing, and Funding

If you need urgent business funds, MCAs are usually processed in less than a day. Funds may reach your business account in three days, depending on the bank you use.

Less Stringent Qualifications

Merchant cash advance companies are only interested in the credit sales your business makes. Credit scores rarely influence their funding approvals.

No Collateral

MCAs are unsecured. You don’t have to use your assets to secure business funds.

Flexible Payments

The paybacks are calculated based on your credit card sales. In most cases you don’t have to worry about missing a repayment deadline since there’s no fixed payment period.

Fits Any Business Use

Once you get a business cash advance, you can use it to cover any business expense. The best use for these funds is to offset short-term operating costs like restocking. You can still use this cash to buy equipment, make payroll, expand your business, and meet other company needs.

FAQs

Who Can Apply for a Merchant Cash Advance?

A merchant cash advance is available to small businesses that make credit or debit sales.

What are the Requirements for Cash Advance?

When applying for a cash advance online, you need: 

  • A signed application
  • Credit card account statements
  • A business bank account
  • Business bank statements (last three months)

Is a Merchant Cash Advance a Loan?

MCAs are technically not loans. You repay MCAs as a percentage of your daily credit sales plus a predetermined fee.

Do Cash Advances Affect My Credit Scores?

In most cases an MCA does not result in a personal credit inquiry. So, taking a merchant cash advance (in most cases) won’t hurt or build your credit score.

 

Timothy Kelly
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