- A merchant cash advance is a funding option for businesses suffering from cash flow issues.
- You'll receive a one-time, lump-sum payment and then pay the money back with a percentage of your sales over time.
- MCA is a good option for businesses that are not eligible for small business loans or who need funds immediately.
- This article is for any business owner dealing with cash flow problems.
If your business is struggling with cash flow issues, you are not alone. In fact, according to a survey by US Bank, 82% of small businesses fail because of cash flow problems. Cash flow issues occur when your monthly expenses exceed the amount of cash you have with you. This could be due to slow sales or lag in customer payments. Poor cash flow affects your ability to invest in your business and affects your daily operations.
If you're dealing with cash flow issues, you might be considering small business financing of some sort. In some cases, a merchant cash advance is a useful option. But beware: MCAs are expensive, and they are not federally regulated.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) allows you to cover temporary cash flow problems with future sales. You'll receive a one-time, lump-sum payment and then pay the money back with a percentage of your sales over time.
An MCA can be a good option for businesses that process large amounts of credit card transactions and need fast access to cash. If your business does not accept credit card transactions, an MCA will not be an option for you.
did you know? With MCA, you will receive a lump sum payment which you will repay along with a percentage of your sales. Know all the difference between business loan and merchant cash advance.
How does a merchant cash advance work?
Applying for and obtaining an MCA is a relatively quick process. The amount you accept will depend on the volume of your daily credit card transactions.
You can get anywhere from a few thousand dollars to $200,000, and you may be able to access the money in a matter of days. However, repayment terms are usually shorter, often less than 18 months.
The cost depends on the amount you receive and your factor rate, which ranges from 1.1 to 1.5. The financial strength of your business determines your factor rate. A better credit score translates to a lower factor rate.
For example, let's say you receive an MCA for $100,000, and your factor rate is 1.2. This means you will owe a total of $120,000.
Your lender will charge a percentage of your daily credit card transactions until the money is paid off. This percentage is known as the holdback rate, and it usually ranges from 10% to 20%.
Most lenders deduct these funds from your account automatically. Repayment terms are based on a percentage of your daily sales, so you won't find yourself in financial bind if sales at your business suddenly slow down.
When Should You Use a Merchant Cash Advance?
Although MCAs don't have the best reputation, there are times when hiring one could be the right choice for your business. For example, they can be a good option for businesses that need fast access to cash, but don't qualify for a loan from a bank.
Even if you qualify for a loan, you may still need immediate access to funds. MCAs are processed much faster than small business loans and come with minimal paperwork.
Overall, MCAs are a good option for businesses that need money fast to cover short-term expenses. If you run a seasonal business, need to cover temporary cash flow issues, or pay for one-time business expenses, an MCA can help.
Tip: MCA should be a last resort and not a funding option. For other sources of working capital, consider these best business loans for small businesses.
What do you need to get a merchant cash advance?
Qualifying for an MCA is easy because, unlike a small business loan, you are not required to show years of business history. In many cases, you don't even need an excellent credit history to qualify.
You must be able to show at least six months of credit card transactions. A good sales history can make it easier for small business owners with bad credit to qualify.
Traditional banks usually do not offer MCA, so you will need an alternative lender. Lending Markets is a good place to look because you can fill out a single application and compare offers from multiple lenders.
FYI: Most banks and traditional lenders do not offer merchant cash advances. Consider an alternative lender if you need an MCA for your business.
Once you have found a lender, you will fill out the application and provide the following information:
- proof of identity
- contact information
- the amount you wish to borrow
- Company Information
- Bank and credit card processing details
- business tax return
Pros and Cons of Merchant Cash Advances
Alternative lenders have different advantages and disadvantages that you should be aware of before accepting a loan.
- They have a fast application and approval process. Applying for MCA is easy, and the approval process is quick. Unlike small business loans, MCA paperwork is minimal, and you can get the money within a few days.
- They are a viable alternative to a small business loan. Some businesses do not have the credit history or business experience to qualify for a small business loan. MCA is a good option, provided you can show a large amount of credit card transactions.
- They can be used for anything. When you withdraw MCA, there is no requirement as to how you can spend the cash. You can use the funds however you think they will be most useful.
- They do not require collateral. There's no collateral required, other than committing to a percentage of your future credit card payments.
- they are very expensive. Merchant cash advances can be incredibly expensive, especially if you get the high rate factor. But even with a low rate factor, you can get up to 35% with an APR.
- They are not federally regulated. MCAs are regulated by the Uniform Commercial Code in your state. Since they are not federally regulated, they are not subject to laws such as the Truth in Lending Act, which protects consumers from unfair lending practices. As a result, many business owners find MCAs overly complex and difficult to understand.
- They won't help you build business credit. Your lender will not report payments on time to the major credit bureaus, so an MCA will not build your business credit. The advantage is that it may not harm your credit either.
- They can create problems of excess cash flow. While MCA provides short-term relief, it can create problems of excess cash flow over time. Mandatory daily payments can become a burden and trap your business in a cycle of debt.
Important achievements: The application and approval process for MCA is quick and easy, and the money can be used for anything. But they can be very expensive and won't help you build credit.
Merchant Cash Advance FAQs
How is a merchant cash advance repaid?
When you take out the MCA, your lender will automatically deduct a percentage of your daily credit card sales from your bank account. These payments will continue till the cash advance is paid in full.
The repayment period usually lasts for 18 months. The higher your sales, the faster you'll pay in advance.
What happens if you default on a merchant cash advance?
The consequences of a lapse in MCA depend on the exact terms of your contract. MCAs are not considered loans, so they are not governed by usury laws. Instead, the MCA is considered a purchase contract between you and the lender.
If you default, your lender can sue you for the amount owed, and you could put your personal and business assets at risk. If you are concerned about the possibility of default, your best bet is to try to renegotiate the terms of your agreement with your lender.
Do Merchants Report Cash Advances to Credit Bureaus?
No, MCA is not considered a loan, and your lender will not report the payment on time to the credit bureaus. This means that an MCA will not help you build your business credit score. But it also means that if you fall behind on your payments, it will not hurt your score.
What are some alternatives to merchant cash advance?
If you are looking for an alternative to an MCA, here are some options to consider.
- Small Business Loan: If you have an excellent credit score, consider a small business loan. Online lenders offer a much simpler application process than banks, and you can get money much faster. The rates and repayment terms will be far more favorable than the amount you can get from MCA.
- Invoice Factoring: If you have a lot of outstanding invoices, invoice factoring may be an option for you. With factoring, you sell your accounts receivable at a discount in exchange for cash. This allows you to have access to funds without having to wait for your customers to pay you.
- Business Cash Advance: The repayment terms of a business cash advance will depend on your current cash flow, and you will receive a lower interest rate than an MCA.
The Bottom Line on Merchant Cash Advances
If you are considering MCA, proceed with caution. This can help address temporary cash flow issues, but you'll pay incredibly high rates for the convenience.
If you are not careful, MCA can create problem of excess cash flow in the long run. Some borrowers find that after getting an MCA, they will need another cash advance soon. This fast cash can entangle you in an ongoing cycle of debt.
Here are some things to consider before applying for MCA:
- Find a lender you trust. Finding a reputable lender makes a huge difference when it comes to your MCA experience. Consider several lenders, and when you find something you like, check out their Better Business Bureau ratings to see what other customers experience.
- Calculate exactly how much you will owe. Once you know your factor rate, calculate the total cost you owe. The holdback rate can help you determine how much you can expect to pay per day. Knowing these statistics can help you determine whether an MCA is worthwhile.
- Ask for early repayment incentives. If you pay off your merchant cash advance early, you'll increase your APR. Ask your lender whether they will reduce the flat fee if you pay off your cash advance early.