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 looking for financing for working capital.
According to a report from the National Academy of Sciences, many small businesses have encountered serious financial difficulties as a result of the 2020 pandemic. As the effects of the pandemic on small businesses are expected to persist until 2022, small businesses will continue. to face strong headwinds in the acquisition of working capital. Bank lending has slowed down and these institutions have very strict loan requirements that most small businesses cannot meet. So how does your business overcome such hardships?
Small businesses will need to be creative and be prepared to seek out other lenders or sources of funding for their working capital. Fortunately, there is a way to turn your future credit sales into cash flow today. Merchant cash advance lenders can help stabilize your business finances.
What is a merchant cash advance?
A merchant cash advance (MCA) provides quick business capital based on future credit income. An MCA is almost always offered exclusively to businesses that make a significant portion of their sales through credit or debit cards.
Unlike traditional loans, cash advance companies offer your business a lump sum payment in cash in exchange for a portion of future income receivable. The cost of the cash advance is almost always expressed as a defined repayment amount with an equally well defined repayment schedule. Reimbursement amounts are typically withdrawn daily or weekly from your merchant credit card sales account, as defined in your MCA agreement.
For example, let’s say you need to borrow $ 50,000 to grow your business. The MCA provider will give you a number (sometimes called a factor rate) that will define the amount of your refund. Let’s say this number is 1.3. To get your repayment amount using the factor rate, multiply the amount borrowed ($ 50,000) by the factor rate (1.3) and the result is the amount you will need to repay (65,000).
Example of MCA factor rate:
Amount of advance
Amount of reimbursement
$ 50,000 x
The application process is relatively straightforward compared to conventional loans, however, the costs associated with an MCA are generally higher.
How to request a cash advance
The application process is straightforward. In most cases, you will need to provide documentation of your merchant credit card accounts (usually several years of prior statements) to give the MCA provider a solid record of sales activity. Additionally, you will likely be asked to provide past bank statements for the same multi-year period. Finally, you will need to check how long your business has been in business.
There may be other requirements from certain vendors that are not covered here, but the three items mentioned here will likely determine your eligibility.
Companies such as New York-based ICapital Funding allow applicants to apply online. Many 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 its amount in just a few hours. Once you have received an online confirmation of your eligibility, it is common for a company representative to contact you to review the reimbursement amounts and other terms of the cash advance.
Carefully review the terms of the agreement
It is very important before accepting your cash advance to read the terms of your agreement very carefully. A cash advance from a merchant might seem like easy money, but it’s one of the more expensive ways to acquire working capital and is suitable for businesses that expect stable or growing sales.
If you don’t understand your agreement, don’t sign it until you seek advice or understand the costs and repayment terms.
How long does it take to get money from an MCA?
In most cases, providers can process the request and transfer the funds to your bank account on the day of your request. The timeframe for funding will depend on the completeness of the documentation you provide to the MCA issuer.
Why Are Merchant Cash Advance Loans?
We discussed the costs and reimbursement process for an MCA. Again, carefully read the terms of your agreement and understand the costs. MCA loans can be one of the most expensive methods of financing your business.
Once you understand the costs and the terms, let’s see why a business would want MCA financing. Merchant cash advance providers can provide a financial lifeline to your struggling business. In many cases, an MCA is the last resort for a business that is cash-strapped or has an immediate and unforeseen need for capital. As we mentioned at the start of this article, most small businesses simply don’t qualify for a traditional bank loan.
Some of the benefits of a merchant cash advance are described below:
Fast application, processing and financing
If you need urgent business funds, ACMs are usually processed in less than a day. The funds can arrive in your business account in three days, depending on which bank you are using.
Less stringent qualifications
Merchant cash advance companies are only interested in credit sales made by your business. Credit scores rarely influence their funding approvals.
MCAs are not guaranteed. You don’t have to use your assets to secure your business funds.
Refunds are calculated based on your credit card sales. In most cases, you don’t have to worry about missing a repayment deadline since there is no fixed payment period.
Suitable for any professional use
Once you get a business cash advance, you can use it to cover all business expenses. The best use of these funds is to offset short-term operating costs like replenishment. You can still use that money to buy equipment, pay payroll, grow your business, and meet other business needs.
Who can apply for a merchant cash advance?
A merchant cash advance is available for small businesses that make sales by credit or debit.
What are the conditions for the advance of funds?
When you apply for a cash advance online, you need:
- A signed application
- Credit card account statements
- A professional bank account
- Corporate bank statements (last three months)
Is a Merchant Cash Advance a Loan?
MCAs are technically not loans. You reimburse 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 check. So taking a cash advance from a merchant (in most cases) won’t hurt or increase your credit score.