A merchant cash advance (MCA) cannot be termed as a loan. Instead, it is a cash advance based on the credit card sales deposited in the merchant account of a business. Once a company applies for an MCA, and it gets approved, the money is deposited into a business checking account within 24 hours or less. When compared to other lenders, providers of MCA evaluate the risks differently. For them to determine if a business can repay the cash on time, they look at the credit card receipts. However, the rates involved in an MCA are higher. If you are the business owner, take your time and evaluate if an MCA will meet all your needs.
The percentages of daily credit card sales that apply to your company’s advance from the holdback amount. In most cases, the holdback percentage is between 10 and 20 percent. However, the percentage remains fixed up until your business manages to repay the advance. For your business to manage to repay the advance fast, the number of credit card transactions needs to be high. In case the transactions of a particular day are lower than expected, the draw from the merchant account lowers. In simpler terms, the payback depends on the incoming credit card receipts.
Difference between the Holdback Amount and Interest Rate
Many companies that provide MCA charge a factor rate. Unlike the loans from banks and other providers, the rate does not amortize during the period of the advance. Depending on the provider, an MCA should be about double or triple digits.
Does your Business need a Merchant Cash Advance?
If your business needs cash to urgently carry out a project, an MCA makes much more sense. However, before taking the merchant cash advance, ensure that the business can manage to cover all the costs involved. It is important to note that since an MCA is not a loan; the providers do not report the payment history of your company to credit bureaus. Therefore, your business credit profile does not gain any strength. All businesses are advised to understand all the terms and conditions of an MCA before committing. Some big businesses have been able to acquire capital to make improvements successfully. The good thing about an MCA is that the criteria of qualifying are less stressing than the other conventional loan providers.
Alternatives to Merchant Cash Advance
There are some other alternatives that businesses can consider if they feel like an MCA might be strenuous. As the business owner, you should be in a better position to know whether or not your business will manage to repay the MCA on time. In case you opt to request for a merchant cash advance to carry out a project, ensure that it will generate income by the time you need to start repaying.
Another option small businesses can opt for is short-term loans. For a business to acquire a loan, the credit profile has to be strong. Failure to provide a strong credit profile may lead to the business being denied a loan. Starting a business is an affair that consumes a lot of cash. Most businesses manage to set up, but end up being short of cash to restock. If you suspect that your business might find itself in such a situation, it is your responsibility to ensure that the credit score is perfect.
A short-term loan is good for a small business because payments are requested either weekly or daily. Therefore, it is easier for the business owner to plan for the small payments instead of having to pay a tremendous amount of money at the end of each month. On the other hand, financial institutions that give out short-term loans report your credit history to business credit bureaus. Therefore, you may take that opportunity to always repay on time so as to strengthen the credit profile of your business.