Merchant Cash Advance
Have you been turned down for a typical business loan? If you are looking for some extra cash flow to help grow your new business, then you should check out a merchant cash advance.
Are a new-ish small business owner looking for alternative financing options? Have you been turned down for a typical business loan? If you are looking for some extra cash flow to help grow your new business, then you should check out a merchant cash advance.
The first question you need to answer is if your business has regular credit card purchases? If you have been in business for more than a year and can show regular credit card purchases of your product, then a merchant cash advance might be a good alternative to a business loan.
But, what is a Merchant Cash Advance?
A merchant cash advance is an alternative form of business financing that has some similarities to a loan, but it actually isn't a loan. You could almost think of it as a cross between invoice factoring and a small business loan. An MCA provides quick financing for working capital your small business might need.
In simplest terms, a merchant cash advance (MCA) is where future credit card sales are bought in advance instead of selling current or past-due billing invoices to a factoring firm. But there's more that goes into it.
Who Qualifies for Merchant Cash Advances?
Believe it or not, nearly any small business that offers payment via credit card could qualify for a merchant cash advance. Unlike bank loans which usually have a long list of requirements you need to meet to qualify for them, MCAs have much fewer requirements involved and not as many hoops to jump through.
And usually neither business nor personal credit scores matter too much. That doesn't mean that they'll never be checked, but they aren't usually given as much consideration in an MCA. Your credit score, as well as how long you have been in business, will factor into your financing terms. However, whether or not you get approved has more to do with your ability to show regular credit card sales.
Would your business be eligible for a merchant cash advance?
Depending on how much funding you're looking to get and what your credit card sales have been like, your business very well could be eligible. Unlike bank loans, you generally don't have to be in business for more than one year to be eligible for an MCA. With traditional business financing, you will probably need to have been in business for several years and have a very stable financial management system.
With an MCA, depending on the provider, you may only need to have been in business for several months. But you will need to show that you've made steady credit card sales in your business.
How Do You Apply for Merchant Cash Advances?
Usually you apply for MCAs online by going to the provider's website. The application process usually won't take too long, and it won't require nearly as many documents to send in as a loan would. But you still should be ready with the following documents to submit along with the application:
Business registration forms and personal IDs
Sales reports including details on credit card sales
Verification of your credit card payment processor
Verification of a business checking account and current bank statements
This is not an all-inclusive list and some MCA providers may require more documents. But this information is usually included in the paperwork you'll need to submit.
How Does a Merchant Cash Advance Work?
Basically, the steps to using an MCA are that you'll receive your funds in a lump sum, and then they'll be repaid each time a credit card sale is made. The MCA provider will have a system set up with your credit card processor that will allow them to deduct a certain percentage of each credit card sale you make. Once the full amount has been paid, they'll remove the system and stop making collections.
Merchant Cash Advance: The Fundamentals
The great thing about a merchant cash advance is it's ideal for small business owners who don't have too many assets to use as collateral, or who don't feel comfortable using either business or personal assets as collateral.
There are still some terms that lenders usually include in their MCA contract that you'll need to abide by so you don't trigger a default. But usually using an MCA is very straightforward.
How does it work in practice?
Once you have applied for and are approved for an MCA, the funds are usually able to be used for any business purpose whether it's buying new equipment, remodeling the interior of your store or hosting a customer appreciation event. An MCA could be for as little as $5,000, or in some cases even be as high as $100,000.
The benefit to this funding is that you don't have to pay it off all at once or in monthly installments since it's not a loan. And, it practically repays itself each time a credit card sale is made. But factor rates are one thing you do need to be aware of before you decide an MCA is what you need.
By now, you might be wondering what the catch is to an MCA and whether it could hurt your business by putting it in debt. Obviously, it costs money to do business, and it costs money to borrow for your business in the form of fees. Two fees you have to watch out for are the deduction percentages and the factor rates.
First, we will go over the factor rates. These are similar to interest rates, but they are multiplied a little differently. They usually range from a 1.14 to 1.48 rate, but you might be shocked at what an interest rate conversion calculator might show. On the low end, you might only pay about the equivalent to 30℅ APR; but on the high end, it could be as high as 200℅.
Because of this variance in how the conversion is calculated, you should consider an MCA as more of a short-term loan instead of a longer form of financing. You'll want to make sure you know what you're paying before you sign any documents.
Second, on the back end, you will need to consider the deduction percentages. This is how much of your daily credit card sales will be taken to pay back the merchant cash advance. The deduction percentage could hurt your daily cash flow if the percentage is high.
Usually, you will pay back between 8-30 percent of your daily sales. So, for example, if you process $500 in credit card sales each day, and your deduction percentage is 10%, then the company will automatically deduct $50 from your daily sales. A higher deduction percentage can mean your MCA will be paid off quicker, but you also may not have the funds on hand to pay off other expenses.
How Long Will It Take To Pay Off a Merchant Cash Advance?
Because an MCA doesn't have a maturity date or have set monthly payments, there isn't a way to know for sure how long it will take. But it could range from a few months to a year or longer.
If you're going through busy months where credit card sales are coming in at very high volumes, then your MCA could get paid off very quickly. If you're going through a slow period, it will take longer.
Is a Merchant Cash Advance Is Worth It?
If you need to get funding quickly, feel confident in your credit card sales, or you've tried to apply for a business loan and have been rejected, then an MCA might be the best option. But one reason the factor rates can translate into high APR interest is that business owners with less business history and less than perfect credit are often considered higher risk. So you definitely should expect an MCA to cost you significantly if that is the case.
It's a good idea to compare different MCA providers and make sure you pick the one with the fairest terms if you decide you want to go with a merchant cash advance. Also, be sure to factor in your credit card processing fees. These along with your MCA payments might mean much less cash flow into your business in the future.
If you have steady daily credit card sales in your business but also have limited financing options, then a merchant cash advance might be a great option for your small business. The first few years of any business can be rocky financially.
You need to grow but you might not have enough capital yet. This is when a merchant cash advance can really help you quickly put money back in your pocket without having to worry about a giant monthly payment plan.
So, if you have quite a few credit card transactions in a typical business day, then a merchant cash advance could provide the much-needed capital you need to grow your new business.