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Merchant Cash Advances Explained
In this economic climate, there’s no shortage of ways for business owners to receive quick funding for their businesses. A convenient way to get access to business funding is through a merchant cash advance (MCA).
If you’re a merchant and you haven’t received funding from an MCA, you could be missing out on a great business funding opportunity. Not only can your MCA application be approved quickly, merchant cash advance providers offer an easy way for you to repay your merchant cash advance.
A merchant cash advance is a type of business funding that is based on your daily credit card receipts. MCA providers will offer funding for your business in exchange for a portion of your future credit card receipts.
Unlike traditional business funding opportunities, you won’t be required to provide your MCA provider with collateral. As long as the provider has access to your future credit card receipts, you could be approved for a merchant cash advance.
Here are the steps that are required in order to get approved for business funding through a merchant cash advance.
1. Complete an application. Provide information about your business including your credit card receipts, business history and industry.
2. Your application gets reviewed. The merchant cash advance provider will review your credit card receipts to determine if you qualify to receive an MCA offer.
3. Receive your merchant cash advance decision. If you’ve been approved for an MCA, you’ll be required to sign a contract. This contract contains details about your merchant cash advance offer including holdback charges and factor rates.
4. Get your cash. You could receive your merchant cash advance funding in a day. Your MCA provider will deposit your approved cash advance amount into your business banking account.
How Holdbacks Affect Your Merchant Cash Advance
Merchant cash advances have holdback charges that are based on your daily credit card revenue. In many instances, merchant cash advance providers charge up to 20 percent of your daily credit card receipts for holdbacks.
Let’s explore how holdbacks can affect your merchant cash advance. Your business had $650 in credit card transactions on Thursday. According to your agreement with your MCA provider, the holdback charge for your total daily credit card receipts is 20 percent. Based on this agreement, your holdback charges for Thursday is $130.
Your MCA provider collects holdbacks automatically. Once a holdback has been collected, it will be applied as a payment to your merchant cash advance.
Holdbacks make it convenient for you to make payments toward your merchant cash advance agreement. However, holdbacks can decrease your monthly revenue. This might make it challenging for you to pay other expenses.
Understanding Factor Rates
When it comes to the convenient features of merchant cash advances, there are costs associated with using this type of business funding. A factor rate is the extra charge that you pay MCA providers in exchange for the funding.
Here’s what you’ll need to now about factor rates before you agree to a merchant cash advance. Factor rates aren’t the same as interest rates. Interest rates are calculated using percents. Factor rates are calculated using decimals.
You can expect the factor rate for your MCA to fall between 1.2 and 1.5. If you get approved for a $39,000 cash advance with a 1.3 factor rate, you can expect to pay $50,700 for the advance after it has been repaid.
Your MCA agreement includes a holdback percentage and a factor rate. Know the terms of your merchant cash advance before you consent to an agreement.
A merchant cash advance is one way for you to receive business funding. This information can help you decide if an MCA is a viable option for your business.
Advantages of a Merchant Cash Advance
There several features associated with cash advance that seem to attract more and more business owners. They include the following:
Funds are Processed Rapidly
When your business is in urgent need of cash injection, the cash advance provides a fast option of approval for the funding. The lump sum amount is processed as fast as within 24hours, enabling you to fund impending business obligations.
They do not discriminate on Credit Score
Even though the lender uses credit card sales to assess the span of your business, they are a bit more relaxed on the credit rating or other core factors that most business loan providers may consider before approving the loan. In fact, a merchant can advance the cash even if you are carrying another debt. It’s important to note that they do not add to your credit score rating.
Collateral is not a Requirement
Most loans from financial vendor’s source for security against borrowed funds in the form of insurance in case you default on the loan. Merchant cash advance is unsecured and does not require any collateral to be put on the line.
Substantial Borrowing Limit
Depending on the merchant, you can be able to access higher borrowing limits according to your understanding between the business owners. Thus, it becomes apparent that the amount is relevant to change, and the payments are flexible, enabling business owners to operate conveniently.
In light of these benefits, the cash advance becomes a viable option for most business owners. Nonetheless, there is also a downturn to the cash advance.
Con of the Merchant Cash Advance
The benefits are numerous and certainly outweigh the drawbacks. Although, the main downturn of merchant cash advice is that if you are not careful and become susceptible to higher holdback payments, the gains will be less than the projected outcomes of the business. Hence, it’s essential to have calculated the expected income generation before engaging the cash advance.
The cash advance is a reliable capital provider for business owners that deal in fast moving goods and retail since it offers cash fast and enables the venture to remain afloat. However, there are other forms of funding that you can consider especially if you have an excellent credit rating. Nevertheless, the above option is an excellent choice with the right management and understanding of the principles behind the proper administration of the borrowed funds.