In the last five years, it has gotten extremely difficult for a business owner to access funds through a loan system by a financial institution. In recent polls, approximately 80% of all small business that apply for loans from a big bank get rejected. In order to deal with this shortfall, the Merchant Cash Advance (MCA) was developed in order to help merchants fund their business. The key characteristics of a merchant cash advance include a limited amount of paperwork and quick access to funds, both of which see it as a much better source of funding than a loan. Loans from financial institutions routinely take weeks to complete processing, and the release of funds is sometimes just as slow. A merchant cash advance provider delivers funds to the receiver in a single lump sum payment and then is repaid over time like a loan. One of the major differences between a loan and an MCA is that an MCA deals with the purchasing of a business' future income whereas a loan deals with lending money to a business in exchange for payment over time with attached interest.
Reasons for Needing Funding
Some of the common reasons a business owner will seek financing are:
- The purchasing of equipment in order to grow the existing business or the purchase of stock to expand the business
- Improving the business’ credit by allowing the owner to pay off other loans
- Marketing the business via a specifically designed campaign
- Renovating the premises or expand them in order to raise the business’ current earning potential
- Purchasing new property for the business to expand to
- Staving off financial stagnation during periods of slow business
Benefits of an MCA
In addition to the much easier method of obtaining working capital from an MCA provider than from a bank, the merchant cash advance has a lot of incentives when it comes to small business financing:
- Much quicker approval times from an MCA provider than a bank. This translates to faster cash-in-hand, allowing you to take advantage of current market prices.
- Whereas business loans require you to have collateral in order to gain favorable consideration, an MCA simply requires you to be subject to a limited amount of conditions.
- A cash advance is also much more beneficial to the cash flow of a company since it does not require any monthly payments or upfront fees that are characteristic of loans.
- There is no limitation on how the funds acquired from an MCA can be used. Funds that are loaned through a financial institution must be used for the stated purpose by the business. As a result, money from a business loan has a very narrow scope of action as compared to money that comes from a cash advance.
- No UCC-1 is required for an MCA
- No worries about points of upfront fees
- A business stands to benefit more from an MCA because of how payments are made. So, if a business’ income slows down, payments are adjusted to reflect this change in income.
MCA's are a great option for a business looking to secure financing. However, not all MCA companies are created equal so it’s important to educate yourself first. Always ask to see the fees that you are required to pay the lender up front. Understand the charges per day and the structure of fees that these charges are levied for, and if they are subject to change over time. Doing your research on your chosen provider is as important as if you were doing research on an investment. Because MCA providers are not subject to the same financial stipulations as banks, they can be more elastic with the rules. This works both in your favor and against it, so ensuring that you have a good measure of your provider is very important to avoid ending up in a sticky situation. MCAs should be utilized if a company needs to expand in any way since they are far easier and more beneficial than a business loan can be. The end result is getting more for less, a definite win from a business perspective.