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What Are the Benefits of a Merchant Cash Advance?
Business owners in need of quick funding may wish to consider a merchant cash advance or MCA. Not a loan, a merchant cash advance allows business owners to borrow against their daily credit card sales. The advance is repaid through a percentage of the credit card sales the business receives in its business merchant account. Business owners will find that the application process for this type of advance is typically quite simple and fast. In fact, when approved for an MCA, business owners can usually receive their funding within 24 hours following approval.
To determine whether a business owner is eligible for a merchant cash advance, the provider will usually evaluate the business’s daily credit card receipts to determine whether it is feasible for the advance to be repaid in a timely manner. The criteria used to determine approval for a merchant cash advance are typically different from those used by lenders and banks. It should be understood that due to this, the rates for a merchant cash advance will often be higher than traditional business loans.
The term “holdback” is one that business owners may find unfamiliar. This term is used to refer to a percentage of the business’s daily credit card sales. The provider takes this percentage, the holdback, as repayment for the advance. Depending on the provider, the holdback could range anywhere from 10% to 20% of the daily credit card sales. This holdback will apply until the advance has been repaid.
Due to the fact that the holdback is based upon the daily deposits in the merchant account, advances can be repaid faster when the business receives more credit card transactions. Should transactions dip lower than the amount expected, the withdrawal from the merchant account would also naturally be lower. This also means it would take longer to repay the advance unless credit card transactions increase.
Comparing Interest Rates and Holdback Amounts
It should also be understood that there is a difference between interest rates and holdback amounts. Factor rates are usually charged by MCA providers. Since merchant cash advances are not usually amortized as like with a traditional loan, the factor rate associated with a merchant cash advance could potentially range between double digits and triple digits.
Should You Choose a Merchant Cash Advance for Your Business?
Although a merchant cash advance can offer numerous benefits when a business owner needs cash without waiting, it is important to understand the costs associated with this type of advance. Since the requirements for a merchant cash advance are less stringent than those of a traditional business loan, you should expect to pay a higher cost for the advance. Even so, if you are a business owner who needs fast short-term funding, a merchant cash advance could be the right option to receive the capital you need.
You should also understand that since a merchant cash advance is not actually a loan, this means that providers are not obligated to report your timely payments to credit bureaus. As a result, even if you make your advance payments on time, doing so will not assist you in building your credit profile.
Possible Alternatives to Merchant Cash Advances
There are possible alternatives to merchant cash advances. Among those options is a short-term loan. Business owners who have a strong credit profile may find they are able to take advance of a business line of credit to solve their short-term funding needs.
With a short-term loan, business owners can obtain the funding they need and repay the loan within just a few short months. Additionally, depending on the terms of the loan, payments could be made on a daily or weekly basis. This makes it possible to spread the debt burden out over the month instead of making a single large payment. The payments made on a short-term loan can also be reported to credit bureaus, which could help you to improve your credit profile.
What is a merchant cash advance
Most people are unfamiliar with this term. The percentage of credit card sales that will be applied to your advance is what is known as the “holdback.” The holdback percentage is typically between 10 and 20 percent and is a fixed amount throughout the life of the advance. The amount that you will repay the lender each day will be determined by the daily balance in your merchant account. Therefore, if most of your transactions are credit card transactions, you will be able to repay the advance quickly. If you encounter a slow day, the amount that you will need to repay that day will also be lower. In other words, the amount that you will pay your lender each day depends on the number of credit card receipts you receive.
The interest rate your lender will charge you is different from the holdback amount. Most of the time, cash advance providers charge what is known as a “factor rate.” This is different from a traditional loan because the rate is not amortized over the life of the advance. It depends on the provider, but a typical factor rate for a cash advance ranges between double and triple digits.
A cash advance might be worth it if you need money quickly for a short-term reason, but the cost of the advance has to be right for your business. That’s because a cash advance will cost you more than a traditional loan. Even so, many business owners take advantage of an advance when they need money right away for business expenses.
Keep in mind that the payments that you make will not be reported to the credit bureaus because a cash advance is not a loan. Therefore, a merchant cash advance cannot help improve your credit scores. Also, remember that interest rates are different for each provider.
Yes, there is an alternative. Small business owners often find that a short-term loan is a better alternative for them. Those who have great credit scores are able to access a business line of credit to pay their immediate expenses. Some of these loans are offering business owners terms as short as two months that are more familiar to a small business owner. You will make payments by the day or by the week so that you will not have to make large payments at the end of each month.