As a growing business, it isn’t uncommon to experience growing pains. Even if your company has decent cash flow, financial responsibilities including payroll, maintaining inventory levels, or unexpected expenses can put added stress on your accounting department.
If your business could use a cash infusion to cover any of the situations as mentioned above, a merchant cash advance is worth investigating. This service is helpful for raising capital quickly. You are free to use the funds for anything your business needs to maintain steady operations, to grow and to thrive. MCA’s are advantageous for smoothing out finances due to a slow month or raising capital to complete repairs, do maintenance, or get prepared for a busy season.
Like every financial service, it is essential to weigh the pros and cons of the service to decide if it is right for your company.
Pros of getting a merchant cash advance
Not a conventional or bank-issued loan – A merchant cash advance is not to get confused with a conventional business loan. A merchant cash advance is an ‘advancement’ of forecast/anticipated credit card receipts. It is ideal for business owners and companies who have less than perfect credit or limited collateral. Merchant cash advances use current business financial statements to decide whether they’ll issue an advance, as well as the amount they are willing to advance your company. If your business shows a steady history of credit card sales and can prove it with supporting financial documents for 2 to 6 months, you are an eligible candidate for a merchant cash advance.
Larger advance limits – Merchant Cash Advance offer access to more substantial amounts of money that can get used as needed. Regardless of whether you need $2,500 or $2.5M, if you have adequate credit card sales transactions, a merchant cash advance provider will take your inquiry seriously and do their best to work with you.
Nearly instantaneous funding – Since applications get filled out and submitted through a secure online portal, the entire process gets completed electronically. No trips to the bank needed! All apps get reviewed within 24-48 hours, so business owners don’t have to wait for weeks for approval. If approved and the terms are agreeable to both parties, the cash advance provider transfers the funds to the business account shortly after that. Once deposited, business owners are free to use the funds as needed.
Predictable payments – Repayment on merchant cash advances begin immediately after issuance. Repayment gets based on a set fraction of your daily credit card transactions. Usually, this fractional percentage, known as a holdback or retrieval rate, varies between 5% – 20%. (The exact amount of your holdback rate is in the terms and conditions of your MCA agreement.) Regardless of whether your company makes $1,000 a day or $100,000, the holdback amount stays the same. For instance, if your contract has a 10% retrieval rate and you have a $1,500 credit card sales day, the daily holdback amount would be $150. If you have a $25,000 day, the holdback amount would be $2,500. Holdbacks take place daily until the merchant cash advance gets paid in full.
Cons of getting a merchant cash advance
Above average fees – Since merchant cash advances are not conventional bank loans, the overall cost and convenience of using this service are more costly for the consumer. Instead of using APR (Annual Percentage Rate) to calculate repayment, MCA’s use a system called ‘factoring.’
A factor rate uses a fractional number that represents the amount borrowers must repay the cash advance provider. Typically, this fractional number falls between 1.1 and 1.5. Many borrowers get confused because the interest rate seems exceptionally low. However, when you do the math, the truth is quite the opposite.
Let’s use this example, a $50,000 merchant cash advance with a factoring rate of 1.3 and a year (12-month) term gets calculated this way:
Multiply the factor rate by the advance amount: 1.3 X 50,000 = $65,000.
Based on this math, the interest rate is at 30%. However, the Annual Percentage Rate could raise based on the agreed upon holdback amount.
Repayments made daily – Repayment on merchant cash advances get automatically withdrawn from your business bank account on a daily basis.
Like all financial products, business owners should carefully consider whether a merchant cash advance is right for their company. To avoid confusion or misunderstandings later, always be sure to read the fine print on the terms and conditions.
Other financial alternatives
If a merchant cash advance isn’t a good fit for your company, other financial services that may be available to you include business credit cards, a conventional business line of credit or a personal or company loan.