If a business owner needs quick access to cash to meet a short-term need for capital, sometimes he or she can leverage their credit card merchant account to access funds. A Merchant Cash Advance (MCA) is an alternative to the lengthy approval process and strict credit requirements required for a traditional term loan, line of credit or SBA loan. Some other terms that may be associated with a Merchant Cash Advance are: Merchant Loans, Advance Loans, Merchant Credit Card Cash Advances, Business Cash Advance, Merchant Advance, Merchant Capital and Merchant Funding.
What is a Merchant Cash Advance?
For starters, a Merchant Cash Advance (MCA) is not a loan, but rather a cash advance based upon the credit card sales of a business. A small business can apply for an MCA and have funds deposited into their account fairly quickly, often times in less than 24 hours.
Merchant Cash Advance providers evaluate risk and weigh credit criteria differently than a banker or lending institution. An MCA provider looks at the daily credit card receipts to determine if the business can pay back the funds in a timely manner. Basically, a small business “sells” a portion of future credit card sales to acquire capital immediately.
Rates on a Merchant Cash Advance can be much higher than other financing options, so it’s critical you understand the terms you’re being offered so you can make an informed decision about ROI.
One of the greatest benefits of a Merchant Cash Advance is that the funds can be used for a host of business expenses. There are typically no restrictions on how you choose to use your Merchant Cash Advance, however some of the more typical uses of an MCA include:
- Buying equipment – Could a new computer, desk, telephone, cash register or software come in handy? Money to pay for the purchase of necessary business equipment could help boost your profits. And if this cash isn’t readily available in your account, a Merchant Cash Advance can provide you with these funds.
- Paying employees – Instead of running your business like a one-man show, a few extra hands could really help. Spending borrowed money on employee’s salaries can be the answer rather than disrupting your cash flow to cover this expense.
- Purchasing inventory – One of the most common uses for a Merchant Cash Advance is buying inventory. It takes products in stock to make business profitable, so it only makes sense to invest in enough inventory to make sure you always have enough to sell to clients.
- Expanding the business – If your business is experiencing some success, you might want to start thinking about taking things to the next level. A lump sum of cash might be just what you need to get business booming.
How does a Merchant Cash Advance Work?
An agreement is made between the small business owner and the MCA provider regarding the advance amount, payback amount, hold-back and term of the advance. Once an agreement is made, the advance is transferred to the business’ bank account in exchange for a future percentage of credit card receipts.
Each day, an agreed upon percentage of the daily credit card receipts are withheld to pay back the MCA. This is called a “holdback” and will continue until the advance is paid in full. Access to a business owner’s merchant account eliminates the collateral requirement required for a traditional small business loan.
Because repayment is based upon a percentage of the daily balance in the merchant account, the more credit card transactions a business does, the faster they’re able to repay the advance. And, should transactions be lower on any given day, the draw from the merchant account will also be less. This means that during times of slow business, the business’ payback is relative to their incoming cash flow.
A business that uses a Merchant Cash Advance will typically pay back 15% – 40% or more of the amount borrowed. This percentage is called the factor rate.
Note: there’s a difference between the hold-back amount that a small business pays every day (as a percentage of their sales receipts) and the repayment amount for the entire advance. There could, for instance, be a hold-back of 15%, and a repayment of 30%, so it’s important for business owners to understand this distinction.
The hold-back percentage is based on:
- The amount of funds a business receives
- How long it will take to pay back the money
- How big the monthly credit card sales are
For Example: A business is advanced $10,000 and agrees to pay back $13,000. This means the payback, or factor rate, is 30%. Moving forward, the business agrees to have 15% of the business’ credit card transactions withheld by the advance company (the holdback) until the $13,000 is collected. If the business is averaging $14,500 a month in credit card sales, approximately $2,160 would be withheld each month and the advance would be paid back in roughly six months.
Typical holdback rates may range from 10%-20%, though this can vary widely based upon the business and risk.
How to know if a Merchant Cash Advance is Right for Your Business?
When does it make sense for a business to use a Merchant Cash Advance? An MCA is an option when a business needs access to capital quickly to take advantage of an opportunity to purchase inventory at a discount, a special marketing opportunity, or other short-term capital need. And, because credit requirements are less stringent, it could be an option for a business that does a lot of credit card transactions, but might have less-than-perfect credit.
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.
How to Apply
The time it takes to get approved for a Merchant Cash Advance could be anywhere from hours to a few days, depending on the paperwork and other details. And once the process is approved, a business could see the funds in their account within 24 hours. Documents that are typically requested are as follows:
- Merchant application
- 6 months most recent merchant statements (credit card processing statements)
- Bank statements (preferably 4 months if possible)
- Copy of Drivers License
- Voided Check
The application process isn’t as complicated as a traditional loan, which typically makes the Merchant Cash Advance approval process a faster option.
Tips and Caveats
This type of financing does not build business credit because Merchant Cash Advance providers do not report to business credit reporting agencies.
Rates for a Merchant Cash Advance can be much higher than other types of financing, and rates vary widely by provider. It’s important to make sure the ROI is positive before you sign on the dotted line.
How do I find the best Merchant Cash Advance Companies?
A decade ago there were only about ten Merchant Cash Companies in existence. Today there are hundreds. There is wide variation between the pricing and terms across MCA providers so it is very important to know what lenders are out there, and the fees attached. Furthermore, not all Merchant Cash Advance lenders are created equal and many are only interested in increasing their bottom line, not yours. So, it's imperative you choose wisely. Additionally, It's not recommended that you shop MCA lenders on your own, direct lenders obviously push their own products, therefore choosing the wrong lender, or not understanding the fine print could very well put your business in jeopardy. Our expert funding advisors are ready to learn about your business needs to determine if a Merchant Cash Advance is right for you and we do so with speed and transparency. Call us toll free for more info! (855) 998-5874