What is a Merchant Cash Advance, and How is it Different From a Traditional Bank Loan?

Are you running a company that needs fast capital but don’t want to go through the trouble on waiting for a traditional bank loan? In some cases, a company’s future revenues may be used to access money immediately. What distinguishes a Merchant Cash Advance (MCA) from a regular loan is the method of repayment? We’ll address these concerns in this blog entry and hopefully clarify some of the ambiguity surrounding merchant cash advances. So read on for information on the what the best merchant cash advance companies can offer their clients.

What is a Merchant Cash Advance (MCA)?

A merchant cash advance is a kind of non-loan financing known as an “asset purchase,”. You’ll get a cash advance up front in return for a portion of your company’s future income when you get a merchant cash advance from a funder. Until the advance has been repaid (together with any charges), your lender will receive a share of your daily or weekly debit and credit card transactions.

As an example, for every $100 dollar transacted, $10 is collected from the MCA provider and the net difference goes to the merchant. The MCA is the lump sum advanced to the business owner in this transaction.

Merchant Cash Advance Pros

The majority of bank funding can take a week or more, MCA offer fast funding often times in under 24hrs. MCA do not require approved specific uses of the capital as traditional banks may require. There is no need for collateral. Even if your credit is challenged, you have a greater chance of being approved than with a traditional loan.

Merchant Cash Advance Cons

Expensive repayment terms. Costs on merchant cash advances tend to be higher than with many traditional loans. MCA are usually shorter in duration under 24 months vs traditional loans.

Best Uses for Merchant Cash Advances:

The typical ebb and flow of business cycles can cause significant fluctuations in cash flow, especially when a company is just starting out. During uncertain times, these organizations may lack the funds or resources to use effectively. When a company is in need of fast funds with minimal paperwork and credit requirements, a merchant cash advance may be their best hope.

Restaurants

Holidays, big events, gas costs, and tourism are the four most common seasonal factors that affect the restaurant business. During an event or holiday, sales may drop by up to 20%. The busiest months are April through August, when tourism is at its peak. To cope with variations in cash flow, restaurant owners develop marketing initiatives, cut staff, extend to delivery and catering, and preserve inventory. MCAs are useful for situations when minimal cash influx cannot make up for missed opportunities.

Retail

Seasonality has a big impact on retailers, too. As a result of the change in sales volume, retail shops must prepare and buy items well in advance using precise forecasting. Maybe the establishment is in a worse position than it has been in the past, and current cash flow cannot support that. Additional funding may help the business stay open. Retailers may be able to acquire new stock, avoid personnel losses, and cover overhead using cash advance financing.

Any business purpose can be served by MCAs. A merchant cash advance might be used for a variety of reasons, as seen below:

  1. Marketing
  2. Payroll
  3. Expanding to new locations
  4. Unexpected expenses
  5. Equipment
  6. Covering cashflow gaps

For seasonal or short-term projects that are highly likely to generate income quickly, merchant cash advances are a fantastic way to get access to capital.

Can I Get a Merchant Cash Advance With Bad Credit?

To qualify for a merchant cash advance, although not required, it is best that business accepts credit cards as part of their regular business practice. Possible factors that can impact your application is having a business checking account, time in business and sufficient revenues for a MCA provider to analyze. We have seen best results for with a business bank checking account, over 6 months in business with over $10,000 a month in revenues.

Merchant Cash Advance Repayment Structures

Merchant cash advances were originally paid back in percentage terms of future income. Restaurants, in particular, who had a hard time getting financing from conventional banks and heavily depended on credit card sales, were big fans of this technique. Take the scenario in which a company owner was given a $10,000 advance and promised to return $13,000 on 10% of future revenues.

Example 1: 10% of $5,000 in monthly sales = $500. The payback would be 26 months.

Example 2 : 10% of $10,000 in monthly sales = $1,000. The payback would be 13 months.

In both examples, the collection is based on the monthly sales of the business, if the sales should slow down due to legitimate reasons the collection amount would reduce thereby increasing the length of repayment term. Conversely, if the business has increased revenue then the amount collected would also increase, but no more than the specified percentage agreed on per contract. The specified purchase percentage, also known as the Holdback, is the most important feature of an MCA contract and why it is not considered a loan since there is no fixed repayment period like a traditional bank loan.

In the case of when a business does not have credit card sales, a MCA provider may review the company’s revenues via their business bank accounts and provide an offer on its estimated future revenues. In these specific cases, MCA providers can offer fixed daily, weekly and even monthly repayment options via ACH (automated clearing house) debits. Make sure to always read the MCA provider contract on how they reconcile ACH debits and adjust accordingly to your business current revenues.

MCA Fees and Cost

A MCA is paid for at a flat price by lenders. To calculate this fee, they use the factor rate, which is calculated at 1.2 or 1.5. Borrowers may be confused by the fact that the factor rate is not a percentage. Converting the factor rate to a percentage and multiplying it by the advance amount is one of the simplest methods to determine what you’ll pay for a MCA. If you requested a MCA of $100,000 and the provider offered you a factor rate of 1.25, you would be charged $25,000 for the capital if you accepted it.

To calculate the cost, $100,000 advance X 125% factor rate = $125,000 total cost – the cost on the advance of $100,000 = $25,000 to the MCA provider.

Different charges might be imposed by each MCA provider. Within the sector, there is a wide range of pricing, with the majority of companies charging just two which is Origination fee and Risk fee.

Application fee – Some MCA providers may charge a fee payable when you apply.

Origination fee – this fee covers the costs of underwriting, which is when the lender verifies your qualifications for the MCA. This fee is a percentage of the total advance, and is charged to originate the loan.

Administrative fee – charged to set up your account including legal costs and credit reports.

Bank fee – these fees are incurred when payments are bounced, MCA providers may recoup the cost per rejected payment.

Risk fee – depending on credit risk variables such as open tax liens, bankruptcy etc this fee covers evaluating your risk profile.  

Providers deduct these fees from the original advance. If you applied for an advance of $10,000 and the provider charges $2,000 in fees, you’ll only receive $8,000. When considering an MCA make sure to ask your provider all the fees upfront so you can calculate your true costs and if the MCA amount will meet your needs.

Best Merchant Cash Advance companies 2022

There are various businesses that provide merchant cash advances, however many of them are scams. Reputation, costs, customer service, and other factors are among the most important when choosing your MCA provider.

1. Good customer service

It’s a good idea to work with a reputable company that provides excellent customer service. You want to know that your concern will be handled if there are any problems. To see how a business you’re thinking of collaborating with is regarded, check out customer reviews.

2. Reasonable fees

While MCA costs are seldom cheap, they differ significantly from company to company. Remember, the factor rate for these advances is usually 1.10 to 1.5, which is how much it costs. Keep in mind the additional costs mentioned earlier which impacts your total costs.

3. Range of funding amounts

Different creditors may supply different sizes of MCA, from a few thousand to several hundred thousand dollars. You’ll want to find a lender who will give you an advance based on your financial needs. MCAs are not always a feasible alternative for large dollar amounts.

4. Flexible payment options

Hold back is the typical payment approach used by MCA, and it represents a percentage of daily credit card transactions to your company. In contrast to a standard loan, which has conventional flat monthly payments, this implies that your sales volume directly affects the amount of your daily payment.

Conclusion

A merchant cash advance may be the answer if you’re looking for a simple and convenient way to fund your company. This option offers a variety of benefits, such as fast processing, minimal requirements and are targeted specifically for small business owners. Compare merchant cash advance companies in your area to get the greatest rates and terms. Before applying for a MCA, make sure to read the repayment terms and costs closely.

Apply Now
Business Funding Solutions