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Merchant Cash Advances Explained
In this economic climate, there’s no shortage of ways for business owners to receive quick funding for their businesses. A convenient way to get access to business funding is through a merchant cash advance (MCA).
If you’re a merchant and you haven’t received funding from an MCA, you could be missing out on a great business funding opportunity. Not only can your MCA application be approved quickly, merchant cash advance providers offer an easy way for you to repay your merchant cash advance.
A merchant cash advance is a type of business funding that is based on your daily credit card receipts. MCA providers will offer funding for your business in exchange for a portion of your future credit card receipts.
Unlike traditional business funding opportunities, you won’t be required to provide your MCA provider with collateral. As long as the provider has access to your future credit card receipts, you could be approved for a merchant cash advance.
Here are the steps that are required in order to get approved for business funding through a merchant cash advance.
1. Complete an application. Provide information about your business including your credit card receipts, business history and industry.
2. Your application gets reviewed. The merchant cash advance provider will review your credit card receipts to determine if you qualify to receive an MCA offer.
3. Receive your merchant cash advance decision. If you’ve been approved for an MCA, you’ll be required to sign a contract. This contract contains details about your merchant cash advance offer including holdback charges and factor rates.
4. Get your cash. You could receive your merchant cash advance funding in a day. Your MCA provider will deposit your approved cash advance amount into your business banking account.
How Holdbacks Affect Your Merchant Cash Advance
Merchant cash advances have holdback charges that are based on your daily credit card revenue. In many instances, merchant cash advance providers charge up to 20 percent of your daily credit card receipts for holdbacks.
Let’s explore how holdbacks can affect your merchant cash advance. Your business had $650 in credit card transactions on Thursday. According to your agreement with your MCA provider, the holdback charge for your total daily credit card receipts is 20 percent. Based on this agreement, your holdback charges for Thursday is $130.
Your MCA provider collects holdbacks automatically. Once a holdback has been collected, it will be applied as a payment to your merchant cash advance.
Holdbacks make it convenient for you to make payments toward your merchant cash advance agreement. However, holdbacks can decrease your monthly revenue. This might make it challenging for you to pay other expenses.
Understanding Factor Rates
When it comes to the convenient features of merchant cash advances, there are costs associated with using this type of business funding. A factor rate is the extra charge that you pay MCA providers in exchange for the funding.
Here’s what you’ll need to now about factor rates before you agree to a merchant cash advance. Factor rates aren’t the same as interest rates. Interest rates are calculated using percents. Factor rates are calculated using decimals.
You can expect the factor rate for your MCA to fall between 1.2 and 1.5. If you get approved for a $39,000 cash advance with a 1.3 factor rate, you can expect to pay $50,700 for the advance after it has been repaid.
Your MCA agreement includes a holdback percentage and a factor rate. Know the terms of your merchant cash advance before you consent to an agreement.
A merchant cash advance is one way for you to receive business funding. This information can help you decide if an MCA is a viable option for your business.