Needing quick cash for your business could be an important decision that you need to make. A merchant cash advance (MCA) is popular for small businesses that require a loan.
Merchant cash advance explained
This loan is provided to a business that has a stable income from credit card sales. This is because a merchant cash advance is offered in return for future sales. So after you receive the lump-sum payment, you then pay it off from the sales you make.
How to get an MCA
The application process for a merchant cash advance is pretty similar to other loan applications. The documentation you need would be proof of identity, bank and credit card statements, business tax returns, and, of course, your credit score.
If you are approved, after a quick application, you should only take a few business days to receive the payment.
These loans are generally short-term and you can receive up to $200 000. In which you will pay back with a percentage of the daily sales you make.
The sales are based on card sales and not cash or check sales. Which you will pay into your connected merchant account.
The cost of a Merchant cash advance
Due to the nature of this loan, annual percentage rates (APR) can be costlier than other types of loans. But it can be difficult to calculate as it is not based on an interest rate or APR. Instead, it is based on a factor rate.
The repayment amount is calculated by taking the loan amount multiplied by the factor rate. Therefore, if you have a $20 000 MCA at a factor rate of 1.2. Your total repayment will be $24 000. Generally, a factor rate of 1.2 to 1.4 would apply.
Because it is more expensive if you qualify for a business loan from a bank, it may be more worthwhile pursuing that option. But for new businesses, which have been in operation for less than two years, or with low credit and fewer revenues, an MCA would be more appropriate.
3 Benefits of a merchant cash advance
1) Application process
The application process is very easy and quick. So needing cash within a few days without going through the hassle of getting a loan from a bank, is a good option. The lenders don’t put high importance on your credit score.
So this makes it easier to get approval as well. All you need to prove is steady card sales from the past year.
2) Having flexibility
A great benefit of MCA is because it is based on the percentage of sales, when sales are down, you won’t pay off as much. For seasonal retailers, it could mean breathing room compared to fixed repayments.
There is also no requirement on the use of the funds, it is your discretion how to use it.
3) Unsecured loan
For new businesses that don’t have many assets, an MCA could be useful as you don’t need to put up any collateral for the loan.
3 Downfalls of a merchant cash advance
1) High costs
As you are paying back the loan on a factor rate, not an interest rate, the cost is higher. At an annual rate, the APR is much higher. Therefore, there are no perks to paying the loan back early.
2) Cash flow interruptions
Because a percentage of your future sales will be taken as repayment of the loan, future cash flow must be properly managed.
There will be less of a profit and it could be tempting to get another advance to keep the business afloat.
3) Your merchant processors
In order for the payments to come from sales, the advance is linked to your merchant processing account.
Therefore, to qualify for the loan, you might need to change merchants and cannot change again until the money is paid back in full. Make sure you are fully satisfied with the contract before signing a deal.
Summary of a merchant cash advance
A merchant cash advance is a great way for you to get the extra cash if you need to get over the hump. And because it is a percentage of sales you don’t have to stress too much on paying the monthly bill, but it can be a hindrance to future cash flow.
This is an expensive, short-term option that could propel your business if well managed.
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