According to a survey from U.S. Bank, a whopping 82% of the small businesses fail due to cash flow problems. Cash flow issues usually come when your monthly expenses are more than the cash you have in hand. Sustaining your cash flow is one of the many benefits of a merchant cash advance.
If you are a small business and need quick access to cash, don’t let your business fail and apply for a merchant cash advance (MCA). It is a fast, reliable, and secure option for all business holders.
Merchant cash advance is easy to apply to and requires no collateral at all.
However, know that if you can’t repay the cash on time, you may get in financial and legal trouble. So, you must get familiar with it before you get the money.
Read this guide to learn the benefits of a merchant cash advance, how it works, and how you can protect yourself and your business.
What is Merchant Cash Advance (MCA)?
A merchant cash advance is a funding option to help businesses suffering from cash flow issues. When you get approved for MCA, you get a lump-sum amount according to your financial needs.
So. It is not a loan but a form of financing in which you receive an upfront payment in exchange for a portion of your future sales.
It is also important to mention that merchant cash advance works best for small businesses. Especially the small business whose revenue comes from debit or credit card sales. If you are a business that does not accept credit card or debit card transactions, then MCA might not work best for you.
Generally, in MCA, you get a repayment period of three to twelve months. But there are exceptions as a few lenders give a more extended repayment period than one year. You can repay the cash in one of the two ways.
- Percent of Daily Sales: In this repayment method, you pay a percentage of your daily sales from the transactions of debit and credit cards. Since it depends on your sale, the repayment amount fluctuates every day.
- Fixed Withdrawal: In the fixed withdrawal method, as the name suggests, you allow your lender to take a fixed amount from your bank account. The lender can take weekly or monthly withdrawals depending on your monthly revenue. However, note that the repayment amount will not change no matter how much sales you get.
In merchant cash advance, there is no interest rate concept as well. Instead of interest rate, you are charged a factor rate. It generally ranges from 1.2 to 1.5, depending on the amount and period.
The factor rate decides how much you will repay on your cash advance.
For instance, if you get a cash advance of $5,000 and your factor rate is 1.4, you will repay $7,000 – a multiple of 1.4. Similarly, if you applied for a cash advance of $100,000 at a factor rate of 1.2, you will repay $120,000.
How Does Merchant Cash Advance?
Applying for a merchant cash advance is easy and getting cash is relatively quick. The amount you are approved for will depend mainly on the volume of your daily credit card transactions.
It can range from a few thousand to over $200,000. Plus, you might be able to access these funds in just a few days.
However, know that the repayment terms are short, and you get a minimum of three months and a maximum of 18 months to repay. The factor rate and costs also depend on the amount you receive.
If your business’ financial strength is muscular, you might get a lower factor rate. In contrast, you will get a higher factor rate if your company has a bad economic history. As already mentioned, the factor rate range is 1.2 to 1.5.
Repayment Method: Percentage of Sales
Let’s say you have strong credit and debit card sales for better understanding. So, you take an advance of $40,000 with a factor rate of 1.3; your repayment amount will be $52,000.
Thus, if your monthly card sales are $60,000, you let your lender deduct $260 of your daily sales. You will end up paying $52,000 in 200 days.
MCA doesn’t use annual percentage rates, so you can use a calculator to know that the APR for the commercial transaction is 93%.
The actual daily payment also depends on how well your business performs. If your business performs better, you will pay off the advance sooner. Thus, your APR will be higher too. Similarly, if the sales decrease, it will take longer, and the APR will also be low.
Repayment Method: Fixed Withdrawal
If you go for the second repayment method, fixed withdrawal, you opt for fixed daily payments. The provider will calculate your fixed price based on your monthly sales.
So, if your monthly sales are $75,000 and we divide it by 30, it will be $2500 in daily sales, allowing the lender to deduct $260 every day for 200 days. Remember, the APR will be 93%, and it will stay like it, no matter the volume of sales.
When to Use a Merchant Cash Advance?
There are times when MCA can best help you. But there are also times when MCA can get you in trouble. MCA is only best if your small business needs cash flow fast and you cannot apply for a loan from the bank.
Even if you qualify for the loan, your small business may need immediate access to cash and that too without much paperwork. In such a situation, too, MCA is suitable.
Ultimately, MCAs are an excellent option for all the businesses that need fast access to funding for their short-term expenses. If you run a seasonal business and require temporary funds, an MCA could help.
Eligibility Requirements of Merchant Cash Advance
It is easy to qualify for a merchant cash advance because you don’t need any business history, unlike a small business loan. Generally, you do not even need excellent credit history to qualify for MCA.
You need six months of credit card transactions. Remember, a good sales history makes it easier for any business to qualify.
You will need an alternative lender for an MCA as the traditional bank does not offer MCAs.
You can also look at lending marketplaces to fill out a single application and compare offers from multiple lenders. If you have found a lender, you will be required to provide the following information.
- Proof of identity
- Required amount
- Contact information
- Company information
- Bank and credit card processing statements
- Business tax returns
Advantages To Merchant Cash Advance (MCA)
Different lenders can have distinct advantages for you. But few advantages remain the same no matter the lender.
Below are a few benefits that you should know before applying for a merchant cash advance for your small business.
Benefits Of A Merchant Cash Advance
- Fast and Reliable Approval Process: Applying for MCA is not rocket science; instead, a very straightforward, easy process that can be done without expert help. It is not like traditional loans where you have to go through a lot of paperwork before receiving funds. With MCA, the paperwork is minimal, and you receive funds within a few days.
- Funds used for anything: When you get an MCA, know that there is no requirement of where you should spend the cash. You can use the funds wherever you want and where you think will be most beneficial.
- No Collateral: There are no collateral requirements for you if you take MCA. However, you will have to commit a percentage of your credit card payments.
- Best Alternative to a Small Business Loan: It is tough to qualify for any small business loan if you have a bad credit history. So, in such a situation, MCAs can help you best, provided you have a high volume of credit card transactions.
- Repayments Adjusted on Sales: With a merchant cash advance, your payments are not fixed. Instead, it changes with the volume of your sales. If your sales increase, you repay a higher amount, but the repayment amount is less if your sales decrease. Resultantly, there is less pressure on your budget even if you are not making high sales.
Alternatives To MCA
If you don’t want to go with MCA, here are a few alternatives available that can best help your business.
- Consider Applying for a Small Business Loan: If you have a good credit score and your business has a solid financial history, go for a small business loan. Many online lenders can provide quick access to cash, even faster than banks. The repayment terms and interest rate will be lenient if you get this loan.
- Invoice Factoring: Invoice factoring is ideal for a small business with outstanding invoices. In this, you sell your accounts receivable at a discount and get cash. It enables the borrower to access funds without waiting for the customers to pay.
- Business Cash Advance: You get cash at a minimal interest rate in a business cash advance. The repayment terms in this depend on the business cash advance.
Is A Merchant Cash Advance Right For Your Company?
MCA seems appealing to those who need short-term loans with poor credit history and bad credit. However, know that it can harm you if you are not careful with that.
So, it is wise to take some time and reconsider other businesses before you apply for a merchant cash advance.
Applying for MCA? Trust Specialty Capital
If you are going to apply for MCA, you need to proceed with caution. Here are three things you must do before applying for MCA.
- Find a Trusted Lender: In MCA, a trusted lender is the most critical factor. When looking for a new lender, always see their Better Business Bureau rating and see what reviews they had from their customers. Speciality Capital can be your best partner for MCA with a better BBB rating and customer reviews.
- Calculate the Amount You Need: Calculate the total cost of what you need in your business and apply only then. With this, you will know your factor rate and determine how much you will have to repay.
- Ask for Early Repayment Incentive: If you repay your merchant cash advance early, you will help lift your APR. So, ask your lender if they will lower the flat fee if you repay them early.
The Bottom Line – Benefits Of A Merchant Cash Advance
A merchant cash advance is best for small business owners who don’t have much cash in hand and want to continue their business. However, if you are not careful, it can cause more cash flow problems than you already have.
It is seen for some borrowers to take another cash advance after receiving an MCA. So, know that this fast cash can trap you in an ongoing cycle of debt. That’s why caution is essential.
All in all, MCA is the best option to use in need of quick access to money for cash flow.