Table of Contents hide Who Qualifies for an MCA What is a Business Cash Advance What Are the Risks of a Merchant Cash Advance Are MCAs an Alternative Financing Option What Credit Score Do I Need What is a Merchant Cash Advance Calculator What is the Merchant Cash Advance Payment Structure What is the Process to Apply for a Merchant Cash Advance Do You Think a Merchant Cash Advance is the Right Choice for Your Company Can You Explain How I Can Get Out of My Merchant Cash Advance What Happens if You Default on a Merchant Cash Advance How Do You Calculate the Cost of a Merchant Cash Advance Why are factor rates so high? What is the Difference Between a Merchant Cash Direct Lender and MCA Broker? What Are the Alternatives to Merchant Cash Advances Who Qualifies for an MCA Merchant cash advances are available to almost any business if they have daily credit card sales or monthly. Companies that qualify for merchant cash advances include restaurants, dry cleaners, dentists, doctors, hotels, etc. MCAs have no limits on how you use your business cash advance loan. What is a Business Cash Advance A business cash advance is an unsecured funding option based on future credit card sales (future receivables). It is not a business loan. You pay a fee or factor rate on the cash advance, and merchant cash advance repayment periods are within 90 days to 12 months (or longer). Rarely do the MCA lenders require you to change your credit card processor. However, there are many risks associated with using a merchant cash advance. What Are the Risks of a Merchant Cash Advance Merchant cash advances are an expensive alternative to traditional business loans. If you need help making your payments on time, the merchant cash advance providers could report a default to credit reporting agencies, making it harder for you to obtain other types of financing. Also, the lender might report a default to the consumer reporting agencies, harming your business credit score. Are MCAs an Alternative Financing Option An MCA is an alternative financing option for small businesses needing access to cash. It provides immediate access to working capital, allowing them to purchase inventory, pay bills, or hire employees. Since you get money upfront, it’s perfect for filling cash flow gaps. Applying to a merchant cash advance company for a business cash advance is simple, straightforward, and can be 100 percent online. Unlike traditional bank loans, approvals can take minutes and funding in a few hours. Once the application is approved, the money gets paid directly into your bank account. Alternative lenders are flexible with their funding options, including monthly installments, for those qualified, which means you can repay an advance over time. What Credit Score Do I Need Unlike your business bank and traditional lenders, the MCA provider doesn’t care about your poor credit score but focuses on your business performance. Conventional bank loans often take weeks to process, and you may have to wait months before getting the loan. They also require a personal credit score in the mid-600s or better. But with merchant cash advances, you can apply and get quick access to the funds today. The underwriting process is speedy. Most online lenders don’t judge you by what you’ve done in the past, and their goal is to help you succeed in the future. Most online lenders do a soft credit check to approve you for an MCA, even if you have bad credit. What is a Merchant Cash Advance Calculator A merchant cash advance calculator will help you calculate an MCA advance’s cost and repayment terms. When applying for an MCA, it can take time to understand the fees and payments. Using a merchant cash advance calculator can make your life easier. You can also compare different lenders to see what works best for you. What is the Merchant Cash Advance Payment Structure An MCA is not a loan but an advance against future revenues (purchases). As such, the payment method may seem foreign to you. The merchant cash advance provider will debit money from your daily transactions to repay the MCA, though others allow weekly debits. Some may offer monthly payments. There is usually no grace period if your MCA requires a daily payment. Unless otherwise stated, you must pay back the MCA the day after the funds’ disbursement. A holdback rate is a percentage of sales. Usually, this percentage is between 10% and 20%. If you generate $100 daily, you will owe $10-$20 to repay the advance. The business cash advance offers flexible repayment terms reflecting your daily or weekly sales. If you have more sales, you will pay more. However, if your sales are slow, you will pay less. KEY NUMBERS FOR CALCULATIONS Amount of cash advance you will receive from the lender. Factor rate (converted to a decimal) Fees (may be referred to as administrative cost, origination fee, or closing fee) Average daily/monthly credit card sales The holdback percentage is the amount withheld from daily sales. With this information, you can calculate approximate daily payments, how long it will take to repay the advance, and the total amount you can expect to pay. What is the Process to Apply for a Merchant Cash Advance The application process is straightforward. Merchant cash providers will need you to provide proof of minimum monthly revenue and your credit card sales volume. If you want a merchant cash advance, submit a one-page application and copies of your bank statements from the previous three months. Once you receive your MCA approval, you will receive your merchant cash advance agreements. The entire application process can be as short as a few hours. The eligibility requirements are minimal. Depending on the lender, you can be in business for a few months and have only a few thousand dollars in monthly revenue. Do You Think a Merchant Cash Advance is the Right Choice for Your Company A merchant cash advance can be helpful when you need money fast, but it can also cause problems if you aren’t careful. A business cash advance can be beneficial for many reasons, including helping small businesses through temporary cash flow problems. Another good reason for using a merchant cash advance is when you need money for a short-term project, like purchasing inventory. Merchant cash advances are not loans but a way for merchants to get short-term financing against future sales. It’s when a merchant needs money quickly to cover unexpected expenses. Can You Explain How I Can Get Out of My Merchant Cash Advance Applying to multiple MCAs can get expensive fast, and stacking them on top of each other doesn’t help you either. Prioritizing repaying your cash advance in total would be best before applying for additional financing. Try to replace your merchant cash advances with a more traditional small business term loan to break the cycle of debt. Use collateral or assets to get an asset-based loan. Consult your merchant cash advance financing lender. Try a consolidation loan. What Happens if You Default on a Merchant Cash Advance If you default on an MCA, your payment history will report to the business credit bureaus, and you might also lose access to financing in the future. Defaulting on any loan or cash advance can cause a cascading effect. The merchant could come after your assets if you signed a PG (personal guarantee). However, most MCA companies do not ask for that PG. Remember that switching bank accounts, changing your merchant account processor, taking cash, or impeding and hampering the ACH payments can constitute default. How Do You Calculate the Cost of a Merchant Cash Advance Since you are paying more than the amount advanced, how do you calculate the payment schedule? This factor rate will vary among small business lenders. The quoted percentage helps you estimate the total amount you will pay back. For example, if you agree to pay the advanced amount plus 15%, you can multiply the amount advanced by 1.15. You must consider any processing fees associated with the merchant cash advances terms. To determine how long it will take to pay back the cash advance, take the cash advance amount you will borrow and multiply it by the factor rate. In this example, a cash advance of $100K with a factor rate of 1.15 means multiplying $100K by 1.15 = $115,000. Assume a 9% holdback of the daily credit card business. Divide your monthly sales ($100K) by 22 (days in the month). Take that number and multiply it by the holdback. $100K / 22 = $4545 (average daily sale). Multiply that number of $4545 X 9% = $409. That is what you’ll pay daily. Divide $115,000 (total amount owed) by $409 = 281 (payments to equal $115K). Assuming 22 days in the month, take 281 and divide by 22, which equals 13 or the approximate number of months to pay the advance. You can use loan calculators to determine your lump sum amount, factor rate, and term to generate the payment amount. Why are factor rates so high? An MCA is a short-term cash advance against future receivables that allows a business owner to receive a lump sum of capital against future credit card transactions. These advances are to help cover immediate expenses. However, they do not charge interest; it’s a flat fee and not expressed as an annual percentage rate. Because of the risk of these transactions, they often come with higher rates than a traditional loan. What is the Difference Between a Merchant Cash Direct Lender and MCA Broker? The difference between a merchant cash advance direct lender and an MCA broker is that the merchant cash advance companies provide the funds directly. At the same time, the latter acts as an intermediary between you and the lender. A direct lender will offer you an MCA loan with their terms, rates, and payment schedule, while a broker works with several lenders to find one that best meets your needs. Direct lenders tend to have fewer and more straightforward requirements, while brokers may offer a broader selection of options. What Are the Alternatives to Merchant Cash Advances Many business financing options are available to a smaller business, even with a less-than-perfect credit history. Some others include short-term and long-term loans that can help companies to get through hard times. There are options even if your business doesn’t qualify for an SBA or bank loan. Business Line of Credit An unsecured business line of credit, often a revolving loan, is a form of short-term financing you repay in installments over a certain period. A business line of credit can be an alternate funding source to traditional lending options like bank loans and SBA loans. Asset-Based Loans ABLs are an excellent small business loan option for businesses that need capital quickly. Specific items owned by the company secure these types of loans. For example, if you own a manufacturing company, you can use your inventory as collateral for a loan. Asset-based loans are also helpful when growing your business but need more cash flow to fund growth. Consider using an asset-based loan if you want funding options to expand your business. Revolving Credit Line A revolving line of credit is unsecured debt financing for businesses that allows owners to take money anytime. A typical example is a credit card. Banks and other financial institutions often offer revolving credit lines. If the company does not repay the loan within its term, the lender will charge additional fees and interest to recoup the loaned amount. Factoring Instead of waiting for clients to pay you, you can get cash today by selling your accounts receivable through factoring. Accounts Receivable Financing A/R financing allows businesses to acquire money against their accounts receivable. If you sell products to someone else, you’ll get paid before paying back the bank. Accounts receivable financing works best when selling high-ticket items like cars, furniture, electronics, and appliances. You’ll need proof of sales and profit margins to qualify for an account receivable line of credit.
