Running a business is one of the most stressful things you can do in your lifetime but it could be the path to financial success as well. Every step of the entrepreneurial journey comes with a few risks and issues so you must fully utilize all tools in your disposal. These troubles are prevalent even when you are just starting up your own venture.
One of the first hurdles for any entrepreneur is creating the capital to start up their planned business. There are many ways to raise initial funds. Some resort to digging deep into their own savings. There are also those that launch campaigns on crowdfunding platforms. Then there are others that resort to merchant cash advances. While this is a viable option for you, you must at least fully understand what the concept is.
What Is A Merchant Cash Advance And How Does It Work?
A merchant cash advance (MCA) is one of the possible ways for you to raise funds if you are planning on running a small business. Like most capital raising methods, it has its advantages and disadvantages. It is also more effective for certain types of businesses but we will get to that later. For now, let us understand how it works.
During an MCA, a company sells a portion of its upcoming sales in exchange for cash upfront. Generally, entrepreneurs that get into MCA agreements use the cash to pay for operational expenses which will help them move onto bigger tasks. It may sound like it is a loan, but you should treat MCAs differently.
The amount you can borrow will be based on your business’ average credit card sales. As such, financial institutions that offer MCAs will most likely inspect your credit card sales between a set period. Although the loanable amount varies, you can expect to receive around 50% to 250% of your credit card transactions.
You can repay MCAs in a multitude of ways. However, the most common repayment method is by allocating a percentage of your daily credit card transactions to the firm you borrowed from. This percentage you pay is typically called as either as a holdback or a retrieval rate. The repayment period will vary depending on the contract but it typically lasts for 3 months to over a year.
What Are The Advantages Of A Merchant Cash Advance?
One of the best pros of getting in an MCA deal is that you can get capital quickly. Most firms release the loan in a matter of days. Whereas in banking institutions, loans could take weeks or even months before getting approved. If you are in need of immediate upgrades or maintenance work, then an MCA deal is the perfect way to raise funds.
Getting approved for an MCA is also easier than getting a loan from lenders and banking institutions. So long as you have a decent credit sales history, you are most likely going to get approved. Even if you didn’t make a lot of credit transactions within a set period, the firms can adjust your loan to get you approved.
MCAs also don’t require any collateral or credit, unlike loan agreements. This basically means that the deal won’t have any effect on the credit score of your business.
What Are The Disadvantages Of A Merchant Cash Advance?
While its advantages are great, the cons of an MCA are worth looking into as well. First off, MCAs are very costly. Before you get into an MCA agreement, you must study the future revenue and growth of your company. Since repayment is often done on a daily basis, you might struggle to keep up with other expenses.
Another issue with MCAs is that these have fixed values. If you are having problems with cash flow, then it is likely that you are going to have a tougher time repaying your MCA. Fixed value repayments are present in most financing methods however so there is no escaping this disadvantage.
Is A Merchant Cash Advance Right For You?
There are a lot of variables to consider before applying for an MCA. As we’ve said before, it works better for certain business types. Most particularly, it works well with retailers and restaurants. This is because these establishments get daily customers that could pay with their credit cards. If you are running, let’s say a gym, where customers often pay on a monthly basis, then an MCA should be the last of your options.
You should also see to it that you have a good track record when it comes to sales. As with most loans, you will need to first guarantee that you can pay it back. If your business has been in the slumps during the past months, you should not get an MCA even if the approval rates are high.
Hopefully, this guide gives you a better understanding of what an MCA is. Before you get into these deals, be sure to weigh your decisions first.