What is a Merchant Cash Advance Loan?
Tired of going through the hurdles of securing a bank loan for your business? A Merchant Cash Advance is a fast solution to obtain enough capital for your business growth. Interestingly, it does not typically affect your credit rating.
Merchant Cash Advance (MCA) is a tool used by small-scale business owners to raise working capital for their businesses. It enables businesses that receive payments through credit cards or other sources, to obtain capital, in the form of an advance for future credit card receipts which flows through the business’s Merchant Account. It is not regarded as a loan. Small businesses can register a merchant account and receive an advance deposit into the account in a relatively short time.
Providers of Merchant Cash Advance play by set rules, different from that of the traditional lenders. What the MCA provider focuses on is the day-to-day credit card receipts – this will help them determine if the business is capable of refunding the advance within the stipulated period, agreed by both parties. So, in other terms, the small business is literally exchanges a part of its expected credit card sales for immediate working capital. Unlike Equipment Financing this type of loan is looking more at cash flow and less at shareholders credit strengths
How does an MCA Work?
The Small business reaches a compromise with the MCA provider in respect to the specific amount the business requires, the holdback rate, and the amount repayable. Following the agreement, the required advance is directly paid into the bank account of the business.
The two parties would reach an agreement on a certain percentage of the business’s daily revenue to be set aside for repayment of the advance collected. This daily amount is referred to as a “Holdback“. The holdback will be deducted on daily basis, until the business gets the amount he agrees to repay the provider. Businesses with merchant account eliminate the need for collateral, which is a basic requirement for small business loans.
Since the repayment is based on a percentage deduction from the daily revenue of the business, the more sales a company makes the lesser the repayment duration. Hence, slow business days would mean longer repayment duration.
Benefits of a Merchant Cash Advance
Merchant Cash Advance comes handy for businesses that have urgent need for capital, and have sufficient revenue moving through their merchant account daily for repayment. Typically, credit requirements are usually not up to small business loans. So, small businesses that do a lot of credit card transactions on monthly basis but have a low credit profile greatly can benefit from this option.
Merchant Cash Advance Alternatives
What are Other Alternatives to A MCA?
Merchant Cash Advances are not always the best option for a business. It is important to take an in-depth look at the business near-term capital requirements and Cash flow objectives. MCAs are typically short-term credit instruments ranging from 2 – 16 months. This makes them ideal for short-term capital requirements such as inventory expansion or project expenses. In order to understand if the MCA makes sense, you need to understand the exact business requirements and breakdown of the funds that they are being used for. For example, if it is for inventory you want to know how often the inventory turns and how much the margins are each time it turns. This way you can understand if it makes sense from a financial standpoint.
Equipment Financing & Leasing
When a business is looking to acquire long-term assets such as equipment it is best to put together an Equipment Finance or Lease Structure. Equipment Financing and Leasing programs tend to have more strict approval requirements when it comes to shareholder credit and minimum time in business requirements.
Invoice Factoring
For companies operating in a B2B environment with low credit card volume, you can look at factoring their invoices. This allows them to borrow agains unpaid invoices.
Equipment Refinancing/Sale Leasback
If the company owns hard assets sometimes you can pursue Equipment Refinancing or Sale Leasebacks. Every situation is unique and you want to look at all the variables and options to see what financial instruments are going to put the business in the best cash flow position.