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Merchant Cash Advance
Summary: Merchant cash advances are an advance on your future sales. Keep reading to learn more about what you need to know about how they work, what the costs are, and some of the alternatives to a merchant cash advance.
What’s a merchant cash advance?
Merchant cash advances aren’t loans. They are cash advances based upon the deposits in your bank accounts. Business owners can apply for an MCA and have the funds deposited into their bank accounts VERY fast. In some cases, it’s possible to get funds in 24 hours after applying.
MCA providers look at the riskiness of the business and look at the credit score of the owner differently than other traditional lenders. MCA providers look at your daily business revenue, and your daily cash balance. They then see based on this, if the borrower can afford to pay the back the MCA. As a result, because MCA lenders are looking at the business cash flow, and aren’t looking at the borrower personally – the rates on an MCA can be much higher than general financing. It’s important you understand the terms you’re being offered so you can make an informed decision about whether an MCA will make sense for you or not.
MCA lenders look at holdback
When it comes to MCA, the term holdback is a very popular term. The holdback is the % of your daily deposits/revenue which is being used to pay back the MCA. The holdback % is usually between 10% and 20%. It’s a fixed amount the lender is taking from you in order to repay the MCA. Because repayment is based on a % of your daily deposits/balance, the more money you generate the faster you can repay the merchant cash advance.
MCA holdback vs interest rate
There’s a big difference between the interest rate a business owner is paying for an advance, and the holdback amount. Most MCA providers are charging a factor rate. Unlike traditional term loans, the rate isn’t amortized over the course of an MCA. Typical factor rates for an MCA range between 1.1 to 1.3 over a period of time.
Is a merchant cash advance right for you?
An MCA can make sense for your business if you need cash fast to take advantage of a short term opportunity. It’s important to make sure the costs of the cash advance make financial sense. If they don’t, the high costs of an MCA can overwhelm your business! The MCA has a premium cost. There are many alterantives to an mca such as a term loan, line of credit, and more.