Small business owners are probably familiar with a merchant cash advance (MCA). Maybe you have already availed one, or maybe you are still wondering if an MCA is an option that you can consider when facing a cash flow problem.
Getting to know the merchant cash advance
First off, let us define what a merchant cash advance is. A merchant cash advance is a funding option that’s very much unlike your traditional bank loans. It is provided by a lender who supplies you with an amount of cash that will be paid for with your future credit card sales. In essence, you are selling future revenues for a lump sum that your business can use for immediate cash needs.
Just like other financing types, the lender first evaluates a small business to check if they qualify for a merchant cash advance. So, who typically qualifies for an MCA? Most lenders have different minimum requirements. But the basic rule is if your business accepts credit card payments, then you are qualified for a merchant cash advance.
The lender will typically approve an amount and repayment plan based on your contract or agreement. Familiarize yourself with the agreement and its terms and conditions to ensure that you understand the cost and details of your cash advance.
A lender’s merchant cash advance agreement or contract contains the stipulations of your cash advance, which will be paid with your future revenues. You also agree to pay with a fixed interest rate.
Merchant cash advance contracts are between the business owner and the lending company, and they include the following:
This is the sum of money paid to the borrower upon approval of his MCA application. This amount is determined primarily by the financial standing of your business.
This is the amount you owe to the lender, inclusive of fees set forth by the lender. This figure will be higher than your MCA amount simply because it includes a fee called the factor.
While you are working to repay your MCA, you will have to set aside a specific amount from your daily credit card payments as payment for your MCA. This is called the holdback, and is also referred to as the retrieval rate. It is usually somewhere between 5 and 20%, and is determined by factors like the total amount of the business’ advance daily credit card revenues.
The timeframe in which you are expected to repay your merchant cash advance. This can range from 90 days to 18 months. How long you repay your advance depends a lot on the performance of your business, specifically the number of credit card transactions you have each month. The more credit card purchases and sales you have, the faster you can repay your MCA. Because the MCA is only deemed fully paid once the principal and preset interest fees are paid, MCA agreements do not usually include a specified repayment date. Some contracts, on the other hand, may include additional information such as the screening method that the lender uses to assess the borrower’s eligibility.
When should you consider a merchant cash advance?
If your company urgently needs funds for short-term operating expenses such as for the purchase of inventory, for payroll, replacing equipment, and other unexpected expenses, the merchant cash advance is your best option.
The merchant cash advance is also your best bet if for some reason your company is not yet eligible for traditional bank loans. It may be because your company is fairly new, you don’t have considerable assets to use as collateral, or maybe you don’t have a good credit score. All these reasons disqualify businesses from most traditional loans, but not from the merchant cash advance.
The best part about it is it can give you access to funding in a short amount of time, in some cases, within 24 hours. This is why MCAs are perfect for business owners who need quick access to funds and cannot afford to spend several days waiting for loan approval from other financial or lending institutions.
With Booster Financial, availing of a merchant cash advance is a simple and fast process. Filling out an application requires just a few minutes of your time. You can receive your cash advance in a considerably short time with swift approval compared to other short-term or long term loan options.
Advantages of Merchant Cash Advance
As mentioned earlier, availing an MCA has many benefits. The first and most useful to business owners is the ease with which it can be availed. The application process is pretty straightforward and the requirements are easy to provide. Compared to a bank loan where you have to submit various documents, provide a collateral, and present a good credit rating.
The second advantage is that the amount you pay depends on your revenues. Since the monthly payment depends on the credit card sales, you don’t have to produce a specific amount on a monthly basis, whether you have the money or not. So if your business is going through a slow season, the amount deducted from your credit card sales decreases. If your sales are improving, then the amount increases. What does not change is the percentage that is collected from your sales. This allows your cash flow to be steady.
Another advantage of the MCA is that it can be used for whatever needs you currently have in your business. The lender does not have any stipulations as to how you use the cash advance.
Some Reminders before Applying for a Merchant Cash Advance
Look for a trustworthy lender. When it comes to your MCA experience, finding a reliable lender is the first and most important step. First, check out several lenders, and find a few that you like. Assess their Better Business Bureau score to see what other customers have said about them.
Determine exactly how much you will owe. Compute the total cost of repayment once you’ve determined your factor rate. Use the holdback rate to determine how much you can anticipate repaying on a daily basis. Knowing these numbers should help you decide whether or not an MCA is worthwhile.
Request for an incentive for early repayment. If you pay back your merchant cash advance ahead of time, your APR will increase. Inquire with your lender about lowering the stipulated fee if you pay on time.
Here we’ll try to answer some of the Frequently Asked Questions about Merchant Cash Advances for you.
What Are the Fees for Merchant Cash Advances?
MCAs do not charge an annual interest rate. Instead, you’ll be charged a factor rate, which can be anywhere from 1.1 to 1.5 percent. Keep in mind that some lenders may collect added administrative fees on top of this.
If you want to know how much you’ll have to pay, simply take the factor rate and multiply that by the MCA amount. Say your advance amount is at $10,000 and the factor rate is 1.2, then you’ll have to pay a total of $12,000.
What Are My Chances of Getting Approved For a Merchant Cash Advance?
Compared to applying for a traditional bank loan, you have a better chance of availing an MCA. The standards for MCAs are less stringent than other types of business funding. This is why MCAs are so much more appealing to startups and new businesses, as well as businesses with not-so-good credit history. The only requirement, though, is that you have strong enough credit and debit card sales to satisfy the provider’s conditions.
What is the Average Time It Takes to Get a Merchant Cash Advance?
Applying for an MCA is really a quick process. Most MCA providers usually process applications and have them approved within 24 hours. You can expect your cash to be in your bank account in just a few days, once approved.
What Happens If a Merchant Cash Advance Goes Unpaid?
Like any other traditional loan, a merchant cash advance is a legal contract between a business owner and a lender. If you fail to pay your MCA, you could naturally get sued. This could jeopardize your personal and corporate assets in the process. Or, the lender may charge late fees and report the company to the credit agencies. Depending on whether you signed a personal guarantee for the advance, your personal credit may suffer as well. Rather than risk going to court for failure to pay, set a meeting with your MCA provider and try to work out a renegotiation for your payment dues and schedule.
Is It Possible to Get a Merchant Cash Advance If I Have Bad Credit?
Merchant Cash Advance providers typically look at the number of credit card transactions your company processes daily. This is what they consider more than your less-than-satisfactory credit profiles. Usually, they will just want direct debit access to your merchant account due to the fact that the payment to your cash advance is automatically debited whenever you make a credit card sale.
Is a Merchant Cash Advance The Same as a Small Business Loan?
Technically, they are not the same. An MCA is not a loan, but a business transaction.
In a technical sense, no. A merchant cash advance is not a loan, but rather a commercial transaction. This is why MCAs and loans are not subject to the same regulations as other types of business funding.
Can I Obtain a Merchant Cash Advance Through the Internet?
Yes, there are MCA providers that you can apply for simply by clicking through their website. There are companies that have physical locations but you can also avail of their online services. This lets you compare various loan and funding types easily. You can simply browse through Booster Financial’s website and compare loan conditions and offers quickly and easily. You can also get your cash advance deposited directly into your account.
Is This a One-time Program Only?
More than 60% of our clients return to do business with us again. Customers who have tried the competition frequently come back because of our straightforward approach.
What Are Some Common Reasons for Applying for A Merchant Cash Advance?
Here are some of the most common reasons given by our clients when applying for an MCA:
To expand revenues by adding more products or services
For expansion or renovation of business
Need for capital input to cover unexpected expenses
Need to procure inventory and/or equipment
Funding for marketing or advertising campaigns
Do Banks Offer MCAs?
Merchant cash advances are not available from most banks or traditional lenders. If you need an MCA for your business, you can look at alternative lenders such as Booster Financial to help you out.
Will an MCA Help Build Credit Scores?
Since an MCA is not considered a loan, your lender does not report timely payments to the credit agencies. As a result, an MCA has no bearing on improving your business credit score. On the other hand, even if you miss a payment, it won’t hurt your credit score, too.
What Are Other Alternatives to A Merchant Cash Advance?
MCAs have higher APR as opposed to traditional loans, so if your need for cash funding can wait for a little, here are some other options that you can consider:
Business Term Loans – also come in lump sum which you can repay over a period of time, typically longer than MCAs and with lower APR. If you need a bigger loan amount, you may need to offer collateral.
Business Line of Credit – allows you to withdraw funds as needed from a predetermined credit limit. Just like a merchant cash advance, it offers flexibility in repayment. You only need to pay the amount you withdrew plus interest.
We Can Help You Process Your Merchant Cash Advance Today
If you’re looking for a reputable lender and need quick access to funding, Booster Financial is a name that you can trust. Contact us and let us discuss how we may help you with your specific needs today.
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