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merchant cash advance underwriting guidelines
Merchant Cash Advances
Business owners who need cash deposited directly into their bank accounts rely on merchant cash advances (MCA). MCAs provide a smart way for merchants to leverage their credit card receipts in exchange for cash.
If you’re a merchant who conducts credit card transactions, it might be worth your effort to explore MCA opportunities. While merchant cash advances aren’t traditional loans, they can provide you with the money in as little as 24 hours.
Here’s what you need to know about MCAs. You must submit an application to be approved for an MCA. There are several online MCA providers that will assess your application immediately.
After you submit your application, the provider will review it. The most important information that you’ll be required to submit is your business credit card receipts.
The merchant cash advance provider will assess your daily credit card revenue. You’ll receive a decision about your MCA application shortly.
If you’re approved for a merchant cash advance, you’ll be required to sign an MCA agreement. In your merchant cash advance agreement, you will have to repay the advance amount, holdbacks and factor rates.
Although merchant cash advances offer a streamlined way to get cash for your business in a hurry, many of these advances come with a hefty price tag. With factor rates and holdbacks, you can expect to repay the advance plus an additional 20 to 40 percent.
If you’ve been thinking about applying for an MCA for your business, you should carefully consider its advantages and disadvantages.
What You Should Know About Merchant Cash Advance Holdbacks
Your future daily credit card receipts are valuable to your MCA provider. These receipts provide the means for your MCA provider to receive daily (or weekly) payments from your business through holdbacks.
A holdback is the percentage that your merchant cash advance assesses on your future daily credit card transactions. The holdback amount varies depending on the MCA provider. Many MCA providers assess holdbacks that are up to 20 percent of your daily credit receipts.
Let’s take a look at how a holdback works. Your own a thriving nail salon. On Monday, your salon generated $15,000 in credit card receipts. If you’re MCA agreement authorizes the MCA provider to assess a 15 percent daily holdback charge, the holdback for Monday is $2,250. This amount will be applied to your cash advance balance.
Your holdback rate will be determined by your MCA provider. Your holdback rate will depend on several factors including the amount of the cash advance, your daily receipts and the terms of your loan.
Holdbacks aren’t the only charges you’ll incur for a merchant cash advance. Your agreement will include a factor rate.
The Difference Between Factor Rates and Interest Rates
Merchant cash advance providers charge factor rates instead of interest rates. Like interest rates on traditional loans, a factor rate is an additional cost an MCA provider will charge you to finance the cash advance.
e interest rates, factor rates are used in business funding. A factor rate is determined by the length of time you’ve been operating your business, your industry, average monthly credit card sales and your sales and growth stability.
Factor rates are represented as decimals. Many factor rates fall in the range of 1.1 to 1.5. Here’s how they work.
An MCA provider offers your business a $40,000 cash advance with a 1.5 factor rate. The total amount that you’ll be required to repay for the advance is $60,000. As you can tell from this example, factor rates can significantly increase the overall cost of the MCA.
Merchant cash advances offer a good opportunity for funding if they are right for your business. Before you sign an MCA contract, determine if your business can afford the additional expenses. If not, it might be a good idea to explore other business funding options.