Simply Business Loans and Merchant Cash Advance
If you need working capital for a business, you may consider a merchant cash advance (MCA). An MCA is not a loan. It is an advance that you pay back through credit card receipts. If you need money for your business quickly, a merchant cash advance is one of the ways you can receive it faster than a loan. If you are considering an MCA, educating yourself about the payback process is beneficial.
How Does a Merchant Cash Advance Work?
An MCA works like a typical cash advance for an individual. You get a lump sum for your business and then there is a holdback of your future credit card transactions. The retrieval rate is determined upfront so you can consider the impact. This percent is usually between 5% and 20% of each credit card transaction. When you receive the lump sum, the holdback starts. The holdback usually lasts for three months to a few years, depending on your credit card transactions.
How Much Will You Get?
The MCA provider will look at your credit card receipts for the last several months and determine the amount of the advance.
What are the Benefits?
There are many benefits to a business that needs money fast. These benefits tend to outweigh the pitfalls because it is fast working capital and can help a business grow or get through a tough time.
- You Don’t Need a Perfect Credit Score
A merchant cash advance provider won’t just look at your credit scores. They are usually less concerned about a credit score and more concerned with your ability to pay the advance back.
- The Application
Applying for a merchant cash advance is an easy process you can do online. If you need to submit documents, these are usually sent online or faxed.
- Get Funds Quickly
The approval process for a merchant cash advance is usually a day or two long. It may be longer but it isn’t as long as a business loan.
- A Merchant Cash Advance is Unsecured
You don’t need collateral to get an MCA. Your future credit card transactions are used to pay the advance back, so the provider doesn’t require anything else to secure the advance.
- More Money
Some providers will lend more money than a traditional lender. A provider has different qualifications than a bank loan, so they may offer a larger lump sum.
- Easier Payments
The amount you pay back for a merchant cash advance varies. You have the benefit of paying back the MCA with a percentage of your credit card sales. If your business has a slow month your payment is still made.
Who is a Good Candidate for a Merchant Cash Advance?
If you own a business that does mostly credit card transactions, you are a good candidate for an MCA. You may also need to build your credit before applying for a traditional loan. An MCA won’t help you build credit but it will help you get funds while you work on your credit scores. You may need to be in business longer to qualify for a loan, so an MCA will work for the short-term cash you need. An MCA is a good way to purchase inventory if you need it as soon as possible.
What are the Negatives of a Merchant Cash Advance?
The negatives of an MCA usually have to do with the payback. It is expensive to pay the MCA back and can have an effect on the cash flow in the business after the lump sum is gone. The interest can end up being very high over the payback period and fluctuates based on how fast your MCA is paid back. This may cause some businesses to have future problems. If you need cash right away and you are sure your business can survive the high fees and interest of an MCA, it is a good idea. If you have alternatives to an MCA, it is good to explore alternative funding first.
- Line of Credit
- Credit Cards
While a merchant cash advance offers money fast, there are some negatives to the payback of the advance. Look at all funding you qualify for, prior to considering an MCA. When you know everything that is available to help your business, it is easier to make a decision on an MCA. If you have an emergency and need cash fast for something like inventory, sometimes an MCA is the only option. The faster your credit card sales pay the MCA back, the more your interest rate for an MCA increases. The pros and cons of an MCA are for each business to weigh individually and decide if the cash advance works well for them.