According to research, one of the main causes of failure of small businesses is inadequate capital for business owners. Merchant cash advance (MCA) was introduced to promote the growth of different ventures as they provide an easy way to source their capital. However, it is only a temporary option. The owner of the business is required to pay the amount received in the future from the income received from their venture.
How MCA Providers Work
When a business approaches the service provider, they are given a lump sum. The amount repaid is calculated based on the amount of daily income. The rate applied to the cash received is known as the holdback. Different service providers may charge different rates. Most of them will use 5% to 20% depending on factors such as the amount issued, the daily business income, and the preferred repayment period which usually ranges between three and eighteen months. One is required to start making payments immediately after they receive the cash.
Before you are given cash, the MCA provider reviews the amount of cash received by your business within a certain period of time. The exercise helps to determine the amount of money that you are eligible for. You may receive up to 250% of your periodic earnings. There are many reasons why some people prefer using Merchant Cash Advances as their source of capital as compared to other options available.
How to Apply for MCA
Just like in the application of business loans, technology has made it possible for merchants to apply for MCA on different online platforms. The application process requires an individual to provide documents which include their tax returns and banking information. The process only takes a few minutes. Most MCA providers approve the request in a considerably short time as compared to other sources of capital. Once the service provider has processed the MCA, the applicant is notified after some days. For that reason, the cash can be used for emergency business expenses.
The credit score of individuals and businesses is an important factor that lenders consider before approving requested amounts of money. Some of the lenders require the applicants to have a perfect score and that hinders many business people from accessing the capital required to grow their ventures or cater to different expenses. For merchant cash advance service providers, some of the factors considered include the consistency of the sales revenues for your business, your credit repayment history, and the period that you have operated the venture.
Unlike a common practice by financial institutions to ask for collateral , MCA providers do not require it to approve your request. If a borrower fails to repay the loan according to specified terms, the financial institution can dispose of the security to cover the debt. As a result, MCA is a good platform for small businesses as some may not possess enough assets to secure required capital.
Repayment of the Cash
MCA providers provide flexible repayment schedules to their customers. Small business loans require the borrowers to honor their debt which is issued at a fixed rate. Therefore, the business pays a fixed amount of money irrespective of their income during a certain period. The provision may not favor some businesses as some months may not be as productive as others. When you approach a merchant cash advance provider, you will pay the amount approved depending on the periodic credit cards receipts.
Conditions for Receiving MCA
For one to qualify for high loan limits in banks, they are required to have a perfect credit score. MCA providers have promoted businesses as some of them can offer up to $2,000,000. MCA is suitable for organizations that require quick cash and have a good record of their credit card transactions. New ventures can also benefit from the cash advances as they may lack a good credit score to secure loans from traditional financial institutions.
The advance providers determine the amount payable by multiplying a rate known as a factor rate by the amount of money that you receive. Some of them set a certain amount of income that a person or business should make periodically to ensure that the customers can repay the cash in full within the specified period. The factor rate applied is more than 1 and varies depending on the service provider that you approach. Some merchant cash advance providers may use a rate of up to 3%.
Demerits of the Financial Option
There are several disadvantages associated with MCA providers. For example, their services are considered more expensive than other credit options. Some statistics from some of the advance providers have shown that a business or individual may pay a three-digit APR at the end of the repayment period. Unlike traditional financial institutions, MCA firms operate under different regulations depending on their jurisdiction. The financial option may not suit a person or organization that wishes to improve their credit score as most of the service providers do not report to credit bureaus.