Could a Merchant Cash Advance be Right for My Business?
Working in FinTech and payment solutions for the past 10 years has been an eye-opening experience. Through my company’s work providing market capital to businesses, we have found that many small and medium-sized businesses seem to be struggling to find the working capital they need to maintain and grow.
In the right situation, a merchant cash advance (MCA) can be a good option for some businesses. An MCA is financing secured by future sales of the business. It provides up-front capital in exchange for a slice of the business’s credit and debit card sales volume or daily bank deposits until the advance is fully repaid, plus any fees corresponding to the costs. funds.
An MCA is not a bank loan where you have a fixed monthly payment with an interest rate. The cost of money varies, but it is based on a factor rate, not an interest rate. Usually, factor rates range from 1.1 to 1.5. For example, if you borrowed $ 100,000 with a factor rate of 1.2, your total repayment would be $ 120,000.
Refund payments can be withdrawn daily directly from the bank account where cash and credit and debit card deposits are made for a fixed term. The timeframe for money repayment varies, but typically ranges from three to 18 months, with most advances being in the six to 12 month range.
If you have the time, the credit, and the collateral to go to a big bank and get a loan, then you should consider this because the cost of money will be cheaper. However, for all business owners who need cash now, have poor credit, or have no collateral other than their business’s cash flow, an MCA may be an option to consider.
When looking for capital and looking specifically at an MCA, it is important to be aware of any potential setbacks to this type of loan option. Two of the potential risks of an MCA are the short term over the advance and the cost of money.
Since the repayment period is typically six to 12 months, this means that a significant percentage of your credit and debit card sales or daily income deposits will be used to repay the advance. This percentage will fluctuate depending on the conditions of your approval; However, expect at least 10% to 12% of your credit and debit card sales or daily income deposits to go towards the refund. As a business owner, you will need to ensure that your business has positive cash flow and is in a sustainable position in order to avoid over-expanding your business financially.
The cost of an advance is usually considerably more than your standard bank loan. A key to whether you should consider taking an MCA over a more traditional loan option, like a small business loan or line of credit, could be determined by the urgency of your needs. If your financing need is immediate, the value of quick financing with an MCA might be justified, provided you have the cash to repay the advance. However, if you can push back your need for funding and explore other channels, we suggest you do so in order to properly consider other options.
While this may help with the terms of your cash advance, having good credit is not a requirement. In fact, you can have bad credit and get approved because the money is guaranteed by your future sales. Although credit is a factor, it is not the determining factor in obtaining approval.
One of the other advantages of an MCA is that a personal money guarantee is not always required. The advance can often be strictly on behalf of the business. This means that your personal credit as a business owner will not necessarily be tied up in advance and you cannot personally take any responsibility. There are times when a personal guarantee or collateral, such as real estate, may be required, depending on the amount of the advance you request. Generally, if you are staying between 100% and 150% of your monthly income stream, no collateral will be required. However, if you are asking for 150% or more than your average monthly sales, more stringent requirements may be needed for approval.
In summary, ACMs can be an attractive option in specific situations where time, credit, or collateral other than your business’ cash flow is not available. The next time you need financing for your business, consider whether an MCA might work for you, but be sure to do your research and be prepared for any potential pitfalls, such as repayment term and cost. money.
The best way to make sure you’re making the right decision about your financing is to shop around and consider all of your options. Here are some tips to help you shop for financing.
Create a set of relevant financial details of your business that is easily deliverable to lenders. This will save you the time and frustration of having to piece together this information every time you speak with a new lender. The package must include:
â¢ Professional and personal tax declarations for the last two years
â¢ Profit and loss reports for the last six to 12 months
â¢ Professional bank account statements for the last 6 months
â¢ Processing of merchant statements for the last 6 months
Research lenders before you send them your financial package. Make sure they lend to businesses in your industry. Plus, check their credibility by reading reviews online and looking at their Better Business Bureau ratings.
Be prepared to hear no in response to some of your loan requests, but also quickly move past the no and try to find another institution that will help you. Note that each credit institution lends according to different criteria and that there is generally a lender for each type of business.