Concept of MCA
There exist Merchant Cash Advance companies who offer finance to businesses in exchange for a certain percentage of the business’ daily credit card income which is recovered directly from the system procuring clearance and settlement of the credit card payment. This is taken from the customer’s debit and credit card transactions every day until the obligation or the lump sum provided has been reached. The percentage paid by the business firm to the provider is known as a ‘holdback’ or retrieval rate and could be fixed at any percentage from four percent to twenty percent based on the size of the advance, repayment period and the business credit card sales of the respective firm.
The average credit card sales determine the scale of advance a company or business can be allowed to have access to. This is normally reached after a calculation by the providers after reviewing the receipts of the firm for the last three to six months. The duration one takes to pay back the advance is therefore founded on the holdback rates and the sales and not a fixed loan term as opposed to other financing options.
Rates of MCA
MCA rates usually are much higher than other financing options. This is because the criteria of evaluation employed by the providers in regards to risk and weight credit is different from that of banks and various lenders. The focus is mainly on the daily credit card receipts which are used to figure if the business can pay back in time.
Groups of persons who should consider MCA
MCA is suited mainly to businesses in need of fast access to cash and those that have an established credit card transaction history. For new companies with good or excellent credit card sales but haven’t been operating long enough to secure a solid credit history, MCA would come in handy.
How to enroll for MCA
An application can be made online whereby a form is filled and together with it, attached the required relevant documents after which it is submitted to the provider company in question
Benefits of a merchant cash advance
Easier application process
One is required to complete the application form provided online and upload any relevant documents alongside it. Such documents may include credit card processing information, bank account statements or business returns. The application does not take time
Collateral is not a must
MCA companies are not listed and unsecured and therefore do not require that for one to obtain cash a personal or business asset has to be provided.
Providers approve and fund within a short duration, a factor that really sells MCA. Decisions are quickly reached, and cash disbursed in a few days or couple of weeks.
Generosity in borrowing limits
Depending on the credit sales a business accrues over time, providers allow firms to obtain large amounts, some even totaling to a million dollars. This is generous taking into account that no collateral is provided.
Flexibility in payment
Payments are based on holdings deduced from credit card sales. Payment is proportional to the amount of credit card sales, different from regular loans which have a fixed payment and interest rate. This feature is of great help in slow months where income is irregular.
Disadvantages of MCA
High interest rates
Owing to the factor used in the evaluation of risk and credit weight, MCA attracts a higher interest rate.
MCA lack a federal regulation, and therefore their regulations vary from state to state. This as well contributes one of the reasons why interest charged is normally high.
Limited in time
MCA plans do not last long and usually not more than 12 months. In addition to the cost, they are highly unlikely to offer excellent results other than for a limited period.
The least expensive MCA is, therefore, higher than the average financing options since terms are limited to 12 months.
MCA companies rely on past credit card sales information to offer finance. Even though past sales may be an indication of future expected sales, in a case where the business does not do well as portrayed in the past sales, one has to find a way to pay the debts. It’s thus a sort of gamble.