Merchant Cash Advance, MCA, is different from a loan because the merchant receives advance cash based on the amount the company makes, but not according to the credit score. The money requested takes around 24 hours to reflect in the merchant’s account. A loan, on the other hand, demands the owner pledge some assets against the loan for security purposes. Companies that provide Merchant Cash Advance services like Delancey Street evaluate weight credit and risk assessment in a different way than other lenders and banks do.
The service providers assess the daily performance of the borrower to ascertain if he or she is capable of paying back the advance within the given period. Although the borrower receives the money quickly, the service attracts higher rates than ordinary loan lenders. It’s advisable to make a credible decision before requesting the advanced cash and see if it’s valuable as far as the rates and the payment period are concerned.
Advantages and disadvantages
The advantage of the merchant cash advance is that it’s reliable to businesses that require cash without passing through stringent processes involved in other lenders. In ordinary loans, one must visit the provider in person, fill many forms manually, and look for guarantors as well as other time-wasting procedures hence making the MCA stand out as the best. Many business owners opt to visit companies like Delancey Street because they find their services reliable despite the high rates. Most borrowers with bad credit depend on this process because the lenders are only interested in daily cash flow of the business but not the credit score.
However, the downside of the process is that the service does not strengthen the borrower’s credit profile. Additionally, the merchant cash advance lender does not update the borrower’s payment history to business credit bureaus that update the credit profiles of individuals. The other problem is that the borrower suffers because of the daily cash used to repay the advance and especially if the business is not doing well. Again, the merchant cannot access more money unless he or she clears the first transaction.
The lenders, like United Capital and Fora Financial help the business startups because the traditional loan lenders require a detailed report covering the history of the borrower’s business turn them down. They also provide the borrower with an option to decide the best payment method that fits them including a simple process, fast cash, and flexible repayment plans. For the established businesses that are financially stable, the lenders advise them on the alternative services if they need one like credit cards that help in covering other expenses.
Additionally, they get advice on term loans lenders that provide money payable after an agreed period. The APR, Annual Percentage Rates on term loans are lower than the ones provided by Merchant Cash Advance service providers. However, it takes longer for these loans to mature hence not reliable for the business owners.
What are the charges expected on taking advanced cash?
The best thing about the Merchant Cash Advance services is that they don’t have the APR, Annual Percentage Rate. The borrower pays a factor rate that depends on the lender although the factors range from 1.05 to 1.4 in different service providers. Before applying for a merchant cash advance, it’s worth considering if the project that one intends to fund is projected to earn more money than the payback amount.
Additionally, one should consider the payback period before choosing a merchant cash advance over other cheaper options. The truth of the matter is that long-term financing is more expensive than short-term financing as far as the payment period is concerned. The valuable uses of borrowing such money include bulk inventory order, purchasing of new equipment, and marketing campaigns. In these types of investments, it’s easier to pay the borrower with the profit projected to receive as a result of the investment.
The borrower also has the privileged to make low payments during the days that the business makes low returns. The highest number of borrowers covers the ones that intend to cover up ordinary business expenses incurred during the low season. However, such a decision is wise only in the scenario that the business uses its funds to stabilize revenue or increase its funds. It might be a bad business idea to take merchant cash advance to overcome an unexpected or temporary cash flow.
Although the cash advance does not accumulate in case of late payment like the traditional loans, one must be very cautious because it’s not the solution to the long-term financial crisis. The financial crisis might get worse if the lender deducts funds from the daily receipts that will eventually hurt the borrower’s cash flow. The application process of these services demands a high level of transparency and discipline because it mostly takes place online and the borrower fills the application form alone. Besides, the services are accessible through the Mobile Apps making them simpler, faster, and reliable than the traditional loan processes.