Are you in the middle of a cash flow crunch or struggling to meet up with financial commitments? An MCA may be the solution to your problems. But that’s only if you have high credit card sales. Otherwise, get a loan with good interest rates. iPaydayLoans can help you secure these loans by connecting you with lenders who charge only competitive interest rates.
Cash flow issues have been singled out as the bane of many businesses, and the cause of 82% of business failures. A cash flow problem arises when your expenses exceed your cash. If you’re expanding operations, there’s only so much you can do to reduce your operational costs. At this juncture, the most viable solution is getting some funding.
A merchant cash advance is a smart business financing option for you if you have high credit card sales and haven’t been in operation for so long to qualify for many business loans.
What Is an MCA? How Does It Work?
Technically, an MCA isn’t a loan, but an advance on sales. It is an upfront payment on future sales from a merchant cash advance provider. Look at it as the provider buying a portion of your future credit card sales. The ‘upfront payment’ is to be repaid with a percentage of your business debit and credit card sales plus an interest.
It’s best suited for businesses that do not qualify for traditional business loans, need quick funding or have high credit card sales volume. It’s also only available to businesses that process customers’ payments through credit cards.
Little attention is paid to personal or business credit information in MCA applications. Your business should be eligible for an MCA once you can provide proof you process a lot of transactions by card.
How Does Repayment for a Merchant Cash Advance Work?
Generally, merchant cash advances are repaid in one of two ways.
Percentage of debit/credit card sales
An MCA provider operating on this model automatically deducts an agreed percentage of your debt and credit sales daily or weekly, til the entire debt is paid. So, it’s safe to say that the repayment period is not fixed like it is with traditional business loans. Rather, it is based on the business’ sales. In general, the higher the credit/debit card sales, the shorter the repayment term or time is taken to repay the debt.
Fixed withdrawals from a bank account
Here, an agreed sum is directly withdrawn from your business’ bank account regardless of your cash inflow. This agreed sum or fixed repayment sum is calculated as a percentage of your estimated monthly revenue. The percentage remains fixed if or not your monthly revenue equals the estimate. Since the repayment amount is fixed, the repayment period is fixed too. It’s ideal for businesses that don’t rely heavily on credit and debit card sales.
At What Point Should You Consider Getting a Merchant Cash Advance?
A merchant cash advance is ideal for businesses that;
- Process a lot of debit and credit card transactions.
- Have low credit scores (550 and lower).
- Businesses that do not have highly valuable assets to tender as collateral.
- Need quick funding to meet emergency needs.
- Need a little more working capital to make their brand more competitive and their operations more functional.
- Want to purchase inventory at a deep discount
A business should consider its alternatives if it’s experiencing a big slump in sales or struggling to pay up other debts.
What're the Bright Sides and Dark Sides of Merchant Cash Advances?
Funding business ideas, taking advantage of discount offers on bulk orders, and expanding business operations are all familiar pain points for business owners. Uncoincidentally, amongst a few other solutions, they can be resolved by injecting more money into the business. A merchant cash advance is touted as a good financing option by many businesses. But that’s only in theory if you can’t tell its pros from its cons.
Here are some of the pros and cons of merchant cash advances:
Pros
- Straightforward application process: MCAs are pretty easy to apply for and the entire process can be done online. It also needs very minimal documentation.
- Quick processing and funding: Many lenders process deposits within 24-72 hours after application.
- No collateral is involved: MCA providers do not need physical collateral to provide business funding.
- Credit score isn’t a big deal. MCA providers are accommodating toward people with bad credit.
- Flexible repayment terms. The repayment schedule can be adjusted based on how well your business is performing. Other types of business financing have a more rigid repayment schedule which is based on a fixed percentage of your sales.
Cons
- High APR (ranging between 70% and 200%).
- Does not help to build business credit.
Where Can I Get Merchant Cash Advance?
This is a valid question to ask once you have settled for a merchant cash advance ahead of other business financing options. There are so many merchant cash advance providers out there, that making a decision can be a little difficult. Here are the some of the most credible ones:
Reliant Funding
Reliant Funding is known for its simple merchant cash advance application process, and quick turnaround time, which can be processed within 24 hours. It provides businesses with up to $400,000 and only needs the applicant to have been in business for six months.
Fora Financial
Fora Financial is a solid financing option for startups since it requires your business to be only six months in operation. It provides higher merchant cash advances compared to many of its competitors, up to $500,000. However, unlike a service like National Funding, it charges an origination fee.
Rapid Finance
Do you need even more working capital? Then apply for a merchant cash advance with Rapid Finance. They can give you a merchant cash advance of up to $600,000. Their application process is pretty quick, easy and free.
How to Apply for a Merchant Cash Advance?
The application process is quite easy. The major thing you will need to do is show proof that your business processes a high volume of debit/credit card sales each month. Something in the range of $4500-$5000 monthly should do.
Since you will be required to make daily/weekly payments, fixed or flexible, depending on the provider’s repayment model, you should consider the consistency of your cash flow from the get-go. If it’s not so consistent or you don’t have enough cash in your merchant account to support the daily/weekly payment, you may want to look at your business financing options instead.
What Are the Rates and Fees of Merchant Cash Advances?
Merchant cash advance companies do not use the interest rate model you may already be accustomed to. They charge their fees as a factor rate instead, which is usually based on the loan provider’s assessment of your business.
The industry, business financials, number of daily debit and credit card transactions, credit score of the business owner and number of years business has been in operation are all factored in when calculating the factor rate. The higher the factor rate, the higher the fees you will be charged. The total cost of the loan is calculated as the factor rate multiplied by the merchant cash advance.
The factor rate is independent of underwriting and administrative fees which also contribute to the total cost of the loan.
FAQs:
Is it possible to get a merchant cash advance with bad credit?
Yes, it is. Good cash flow can cover up for bad credit. Some lenders have low credit score requirements and will consider you for a merchant cash advance if your business has a strong cash flow. The amount of credit card transactions your business processes each day is an indication of how strong or otherwise your cash flow is.
How can I tell if my business qualifies for an MCA?
Firstly, disabuse yourself from the idea that you cannot get a business loan without proof that you’ve been in business for many years. If you have a high sales number or an impressive number of daily credit card transactions, that’d do just fine. Many lenders consider the growth potential of the business above its profile or credit information.
How quickly can I be credited if approved for an MCA?
This depends on the lender and their lending policies. But whichever lender you choose to deal with, you should be able to get an approval decision the same day you apply. Then, you may receive a deposit as soon as a day or two after that.
What happens if I default on a Merchant Cash Advance agreement?
In response, some people may ask you why you would even consider defaulting in the first place. But we understand that these things aren’t planned. Still, it should be avoided at all costs. Merchant cash advances will do everything legally possible to recoup their money and can report to missed payments to business credit bureaus, reducing your chances of getting financing in the future.
Are there alternatives to MCA and what are they?
Yes, there are. The most common alternative for small business owners is a short-term business loan. This should provide them with more cash to meet their short-term needs. Otherwise, small businesses with good credit profiles can take advantage of a small business line of credit to get enough capital to bridge cash flow gaps. Other alternatives include factoring and accounts receivable financing.
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