There are many options available for small businesses looking for financing options. While many business owners consider the merchant cash advance to be one of the better options, it is important to understand exactly what is involved with obtaining and using a merchant cash advance.
An MCA or merchant cash advance isn’t a loan. Rather, it is an advance that is dependent based on credit card sales that have been deposited into a company’s merchant account. The business owner can then apply for their merchant cash advance and have their advance deposited into the business checking account quickly–oftentimes within 24 hours.
Providers of merchant cash advances evaluate the risk and weigh the criteria for credit differently than other traditional lenders might. These providers look through receipts from credit cards to determine if the business will be able to pay back their advance in an efficient manner. For this reason, rates for a merchant cash advance are typically higher than other options. Business owners must be sure to understand the terms of a merchant cash advance so that they are able to make the best decision as to whether the MCA will meet their needs.
When evaluating a merchant cash advance as a financing option for a small business, owners must learn what is expected of them in terms of repayment. “Holdback” when referring to a merchant cash advance can be defined as the percentage of credit card sales that will be applied to the cash advance. A business’ holdback percentage (typically between 10% and 20%) will be fixed until the cash advance is repaid.
Since repayment is determined by the percentage of a business’ daily balance in their merchant account, a business that has more transactions with credit cards will be able to repay their advance faster. As the payback for the merchant cash advance is relative to all incoming credit card receipts, if transactions happen to drop for a period of time, the draw from a business’ merchant account will lessen.
The Difference Between the Interest Rate and Holdback Amount
Merchant cash advances may make sense for businesses that need money as soon as possible,but all business owners should do their best to ensure that this short-term opportunity makes sense financially for them. Since qualifying criteria is less stringent than it is with other lenders, the merchant cash advance comes at a premium cost. With this in mind, the MCA has proven itself to be a viable option for business owners looking to access capital quickly.
It is important to note that since the merchant cash advance is not a loan, providers don’t report the payment history to any business credit bureaus. Thus, choosing an MCA will not help business owners strengthen their credit profiles.
What are the Alternatives to the Merchant Cash Advance?
Small business owners that are looking for alternatives to a merchant cash advance often choose to use short-term loans. Business owners that have strong credit will be able to leverage a line of credit as a way to meet any short-term needs.
Short-term loans can be used for as short a period as one or two months and will offer business owners terms that may be more beneficial than an MCA. Business owners should expect to make periodic payments either weekly of daily, which is less intensive than having to make one large payment at the month’s end.
Business owners looking to grow their business should carefully consider whether to choose a merchant cash advance, a traditional short-term loan, or another option for financing. The right choice will have the greatest impact on growing the business without causing any financial damage in the long term.