What Is a Merchant Cash Advance?
Many businesses today are facing a cash crunch. In this environment, it’s important to understand the options you have as a business owner. There may be more avenues available than you think.
One of those could be a merchant cash advance. What is a merchant cash advance, and how does it work? This guide answers these questions and more.
What Is a Merchant Cash Advance?
A merchant cash advance, or MCA, is a financing option available to many retailers, restauranteurs, and other business people. With this option, you receive cash in advance of actually earning it. The lender assesses you against your anticipated future credit card sales. They’ll then offer you a percentage of those sales as cash.
You pay the advance back as you make those credit card sales. The lender takes a set percentage of each sale and puts it towards paying back the advance.
How Are MCAs Different from Business Loans?
A merchant cash advance is different from a business loan in a few ways. First, a business loan is assessed against your history. To decide if you’re eligible for a loan, the lender will look at your credit score. That includes information about payment history, how you’ve handled other debts, and more. They’ll also look at your business’s past income.
They’re less interested in information about projected futures. You may show a potential lender your projections for the rest of the year, but they prefer more concrete evidence.
The MCA is leveraged against your future sales. Instead of looking at your credit history and past earnings, the lender is interested in predicting future sales.
That’s why this option is known as an advance, not a loan. The lender is advancing anticipated funds to you. They believe you’ll earn those funds in the future, so all that changes is when you get the money.
Another difference between a business loan and a merchant cash advance is the repayment terms. A business loan is usually an installment loan. That means you’ll make a set payment at regular intervals. Those can be monthly, weekly, or even biweekly.
With a merchant cash advance, the lender takes a percentage of daily credit card sales and applies that to your repayment. If your sales are down one day, you don’t need to worry about “making up” the difference or ensuring you’re meeting a minimum payment amount. Similarly, if your sales are high on another day, you’ll be able to repay more of your advance.
There are also differences in how the lender earns on the money they’ve given you. A business loan will have an interest rate. Merchant cash advances usually come with holdback rates and repayment rates. Repayment rates are sometimes called factors.
The holdback rate is the daily percentage you pay to the lender on your sales. The repayment or factor rate is the amount typically charged. You may, for example, pay a factor rate of 1.20 or 1.40, which means you’ll pay the lender another 20 to 40 percent of the original advance.
Benefits of Merchant Cash Advances for Business Owners
Now that you understand how the MCA works, you’re probably wondering if there are any benefits to using one. There are quite a few, actually.
First, merchant cash advances are often more accessible than business loans. This is especially true for startups or small businesses without lengthy operational histories. You may not be able to prove to a loan lender that you can repay a loan. If you have steady credit card sales or other revenue moving through your business account, then you should be able to qualify for an MCA.
Another benefit is the speed with which funds can be delivered. Loan applications could take time to process. That’s because the lender wants to check in on your history and make credit inquiries. By contrast, a merchant cash advance lender is more interested in your future. They want to see you have funds moving through your account regularly, and they can use those numbers to anticipate future sales.
This process takes much less time, which leads to faster approvals and deposits. If you need cash in a hurry, an MCA is a much faster option than a business loan.
Flexibility is another major benefit of MCAs. Since the lender recoups a percentage from sales, the repayment goes up and down with your sales volume. You don’t need to worry if your sales fall, and you can repay the advance faster if your sales are high.
Drawbacks of MCAs
Like everything, merchant cash advances do have a couple of downsides. One is that MCAs don’t help you build credit. That’s because they’re not loans. If you’re looking to build a better credit history for your business, you may want to investigate other options.
Also, you have to consider that the annualized interest rate can be much higher than a business loan. MCAs could end up costing your business more than a loan might, especially over the long term.
How to Apply for a Merchant Cash Advance
MCAs are good options for business owners who need cash quickly and will pay it back relatively fast. They’re also an option for businesses that don’t have long operational histories or may not otherwise be approved for a loan.
If that sounds like you, you might wonder how you can go about getting a merchant cash advance.
- Your first step should be to research providers in your area. Compare offers. Be sure you understand the holdback rate and factor rates for each offer.
- Fill out the application form provided by a lender. These are typically one to two pages. You’ll have to provide basic details about your business, such as your business tax ID.
- You’ll also need to provide documentation. This is usually a combination of bank statements and payment processing data. The lender will likely ask for several months’ worth of information, so they can accurately assess trends and the amount you qualify for.
- Once you’re approved, you can set up processing as required. Finalize the details on the advance, and make sure you understand the terms. Repayment sometimes starts as early as the next day.
Fund A Better Tomorrow for Your Business
If you’re worried about financing, you have plenty of options out there, and the merchant cash advance is just one of many.
If you think a merchant cash advance might be right for you, get in touch with our experts. With their help, you can get access to the funds you need when you need them.