Why Every Retailer Should Consider A Merchant Cash Advance Application

Why Every Retailer Should Consider A Merchant Cash Advance Application

Why Every Retailer Should Consider A Merchant Cash Advance Application

In an economic landscape marked by volatility, making sound financial decisions can be a daunting task for business owners. Sometimes, you may need immediate funds to meet operational needs or expand your business. Although traditional business loans offer a way out, their terms may not always be aligned with your immediate requirements. That’s where merchant cash advances step in as an intriguing alternative.

What Exactly Is a Merchant Cash Advance?

A merchant cash advance (MCA) operates somewhat like a business loan but comes with its own set of rules. Essentially, this business financing option offers a lump sum of money to businesses in exchange for a portion of their debit and credit card sales in the future. This alternative financial tool has gained popularity for its speed of approval and minimal credit stipulations, making it a go-to for small businesses.

Typical Applications for Merchant Cash Advances

Many small business proprietors opt for merchant cash advances (MCAs) to address a variety of immediate financial requirements. Here are some customary applications for MCAs:

Bridging Cash Flow Deficits

Unstable cash flow can be a roadblock for businesses, especially when it hinders the ability to meet obligations like payroll or bill payments. An MCA can serve as a financial cushion, providing temporary relief until the cash flow situation improves.

Coping with Unforeseen Expenses

Should an unexpected financial need arise and traditional short-term loans aren’t within reach, a merchant cash advance can offer a speedy resolution, often delivering the required funds within a matter of days.

Stocking Up on Inventory

Businesses with a stable record of card-based sales can leverage MCAs to replenish or expand their inventory. The advance is then typically paid back through a portion of the proceeds generated from those inventory sales.

Navigating Seasonal Revenue Variations

Certain enterprises experience revenue ebbs and flows with the change of seasons. To maintain operational continuity during lean periods, these businesses can utilize MCAs as a buffer to cover anticipated income shortfalls.

Ideal Candidates for MCAs

  • New ventures lacking an extensive business history.
  • Businesses with limited or poor credit who wish to avoid applying for credit-challenged business loans.
  • Small business proprietors who can’t offer collateral as a loan guarantee.
  • Early adopters in emerging sectors.
  • Those who find themselves ineligible for traditional loan sources like banks, credit unions, or digital lending platforms.

MCAs can thus offer a flexible, timely financial solution for businesses facing various types of monetary constraints.

Is an MCA the Right Choice for You?

MCAs are particularly useful for businesses that primarily generate income through credit and debit card transactions. This includes a variety of sectors such as retail stores, restaurants, entertainment venues, and online businesses. MCAs are custom-built to act as a short-term cash flow solution, making them a viable option for those who may not qualify for traditional financing options.

How Does an MCA Function?

Unlike standard business loans that require you to follow a fixed repayment schedule, MCAs work differently. An agreed-upon percentage of your daily card transactions is automatically withheld to repay the MCA. This percentage, known as the “holdback,” can fluctuate depending on your daily sales, allowing for more flexible repayments.

Understanding the Legality of Merchant Cash Advances

Merchant Cash Advances (MCAs) are indeed legal, as they are not categorized as loans but rather as a transaction involving the buying and selling of a business’s future earnings. Consequently, MCA providers are not bound by the same regulations that apply to traditional lenders, especially since the duration of an MCA seldom exceeds one year.

In contrast to loans, the fees associated with MCAs are not identified as interest rates. However, if they were to be compared to interest rates, MCAs would typically have significantly higher rates. For instance, the Annual Percentage Rate (APR) can reach up to 200% of the total advance amount.

Important Notes

While MCAs offer a quick source of capital, they can also be expensive. The effective APR can soar to heights of up to 200%, making them a pricier option compared to conventional loans. This high cost is due to the fixed fee structure of MCAs, as opposed to the declining interest rates in standard loans where monthly payments decrease as you repay the loan balance.

Regulatory Landscape

Traditional lending institutions like banks are governed by both federal and state laws designed to protect consumers from exploitative lending behaviors. However, MCA providers operate in a largely unregulated environment, owing to their business model of purchasing future revenues rather than offering loans. This exempts them from state laws that restrict excessively high fees and interest rates.

Points to Scrutinize in an MCA Contract

Due to the relative lack of regulation, it’s crucial to thoroughly review any MCA agreement before signing it. Key points to consider include:

Advance Size

Be cautious if an MCA provider offers an advance amount that appears too large to repay comfortably.

Credit Card Processing

Many MCA agreements have clauses that prohibit the switching of credit card processors. Some even require you to adopt their own designated card processing company.

Billing Changes

Be aware that some MCA companies may alter their billing procedures without prior notification, potentially affecting your repayment strategy.

Holdback Terms

This refers to the daily or weekly repayment amounts that get directed back to the MCA provider. If these sums are too lofty, they could strain your business’s cash flow during the repayment period.

By being vigilant and understanding the terms, businesses can make an informed decision when considering an MCA as a funding option.

The Mechanics of Daily Holdbacks

You might wonder how an MCA provider can automatically deduct a percentage of your sales.

The mechanics of daily holdbacks are relatively simple. An MCA provider will require you to enter into an agreement stipulating the advance’s terms and conditions. This will include details such as the total amount of the advance, repayment period, and applicable fees.

Once the contract has been signed, you’ll be asked to provide bank account information. The MCA provider will then establish a secure connection between your accounts and their own system. This allows them to automatically withdraw through the ACH a specified percentage of your daily sales until the advance is fully repaid.

Some payment processors offer MCAs as an in-house service. Here’s a real-world example: A boutique opts for an MCA, and the provider coordinates with the boutique’s payment processor to specify the daily holdback rate. This arrangement streamlines the repayment process.

Merchant Cash Advance Vs. Business Loans: The Key Differences

One of the most significant differences between MCAs and business loans is the nature of the financing. An MCA is essentially a sale of your future revenue, whereas a loan is borrowed capital. MCAs are not bound by the same regulatory constraints as business loans, allowing for a quicker and more streamlined approval process. Moreover, MCAs don’t require collateral and are generally not influenced by personal or business credit scores.

Crunching the Numbers: Calculating MCA Costs

While MCAs offer a range of benefits, they tend to be pricier due to associated fees. Unlike business loans that utilize interest rates, MCAs use factor rates to calculate costs. Factor rates are not time-sensitive and are applied to the advance’s total amount.

Understanding Factor Rates

The factor rate is a decimal figure set by the lender after assessing your business’s risk profile. Your industry, the duration of your business operations, your sales performance, and credit history are some of the factors considered.

Total Cost of an MCA: A Simple Calculation

The cost of an MCA remains constant, irrespective of how quickly you repay it. To determine the total repayment amount, you simply multiply the initial advance by the factor rate. For instance, if you receive an $50,000 advance at a 1.20 factor rate, you’ll owe $60,000 in total, making the effective cost $10,000 (or 20% of the borrowed amount).

Advantages of Utilizing Merchant Cash Advances in Retail Operations

Discover how a merchant cash advance can be a game-changer for your retail business.

Swift Access to Working Capital

A merchant cash advance offers an avenue for fast liquidity, often within as little as 48-72 hours. Credit scores, whether personal or business, are generally less of a focus for MCA providers than card-based transactions.

With a strong history of debit and credit card sales, securing a merchant cash advance is straightforward. You can invest this immediate influx of capital into business expansion — perhaps by stocking up for high-demand periods or extending your retail footprint both locally and nationally.

Enhances Cash Flow Stability

Managing cash flow can be a significant challenge, especially with rising overheads and fluctuating interest rates on traditional loans. Merchant cash advances provide a robust alternative by supplying immediate liquidity with a predetermined percentage payback plan that usually spans six months to a year.

What sets MCAs apart is the absence of an Annual Percentage Rate (APR) and other undisclosed costs. Furthermore, repayment amounts adapt to your retail sales performance. If card sales dip one month, so do your repayments, making cash flow management more predictable.

Fuels Retail Business Growth

Merchant cash advances are versatile funding tools that can help retail enterprises meet various investment needs. Whether it’s launching an e-commerce platform or optimizing internal processes, an MCA can make it happen.

As an example, are you considering implementing a Robotic Process Automation (RPA) to automate routine, prone-to-error, and time-intensive tasks? RPA can boost your operational accuracy, productivity, and customer engagement. For maximizing these benefits, consulting with an RPA expert can significantly streamline business processes, saving both time and resources. Using an MCA for this project may make sense.

A Steppingstone to Better Credit

While established credit history plays a pivotal role in loan approvals from traditional financial institutions, many fledgling retail businesses struggle due to insufficient credit records. An MCA can serve as a credit-building mechanism for newcomers in the retail industry.

For veteran retailers keen on enhancing their credit profiles, combining credit reporting services with a merchant cash advance can positively impact your credit standing. This will pave the way for securing larger loans with more favorable conditions down the line. Ask your provider if they report to any credit bureaus.

Flexibility in Repayment Plans

The unique feature of a merchant cash advance is its sales-dependent repayment model. This is particularly advantageous for seasonal businesses, as they can strategically use MCAs to meet increased production demands during peak sales periods.

For example, if your retail store specializes in holiday decorations, an MCA can empower you to ramp up manufacturing to meet the surge in holiday orders. The repayment will then naturally align with the sales generated during this busy period.

By exploring these advantages, retail businesses can consider merchant cash advances as a valuable tool to navigate through financial constraints and realize opportunities for growth.

Why Retail Businesses Should Choose Sunwise Capital’s Merchant Cash Advances

Swift Application and Approval

In the fast-paced world of retail, quick access to cash can make or break business opportunities. Sunwise Capital recognizes this need, offering a swift one-page application process that takes less than 5 minutes to complete. Even more compelling is their same-day approval and funding, meaning you can access the money you need almost instantly.

Flexibility and Customization

Sunwise Capital provides a range of flexible financing solutions tailored to your specific business needs and objectives. Unlike traditional loans that may come with restrictive conditions, Sunwise Capital allows for personalized funding solutions that align with your unique business goals.

Eligibility Criteria and Amounts

Sunwise Capital’s eligibility criteria are designed to be inclusive, allowing for a broad range of businesses to benefit. Your business only needs a minimum of one year in operation, a yearly annual business revenue of $200,000 or more, and a personal credit score of 500+ to qualify. Sunwise Capital offers Merchant Cash Advance amounts ranging from $10,000 to $2 million, providing ample financial runway for retail businesses to scale or address immediate needs.

No Collateral Required

Traditional loans often require collateral, which might not be feasible for every retail business. Sunwise Capital’s Merchant Cash Advances are unsecured, meaning you don’t have to risk valuable assets to gain financial support.

High Approval Rates

Even if your business has struggled financially, Sunwise Capital looks at a variety of factors like time in business, type of business, annual revenues, and average daily bank balances. This comprehensive evaluation process results in higher approval rates compared to traditional bank loans, which often focus primarily on credit scores.

Variable Repayment

Payments are tied to your daily credit card sales, providing a flexible repayment schedule that ebbs and flows with your business. This is particularly useful for retail businesses with seasonal fluctuations or variable sales volumes.

Special Programs and Incentives

Sunwise Capital has special programs specifically tailored for various types of businesses, including retail. If you’re renewing your MCA with them, they offer better rates and higher amounts, rewarding long-term relationships. They also accommodate businesses with low average bank balances and excessive NSFs, which might not qualify you for traditional short-term loans.

Tax Benefits

Rates can start as low as $1.15, meaning a flat fee payment of $15,000 on a $100,000 advance. Consult with a tax professional, but at a 35% tax bracket, the after-tax cost could be significantly lower.

Excellent for Poor Credit Situations

For retail businesses with credit challenges, Sunwise Capital’s MCA provides an alternative to traditional financing options. Since the factor rate is based on your business’s sales performance, a poor credit score is not necessarily a disqualifying factor.

It’s Worth It

Although MCAs can be more costly compared to traditional loans due to higher factor rates, the speed, flexibility, and approval rates may make it a preferable option for many retail businesses.

Common Merchant Cash Advances (MCA) FAQs

Eligibility Criteria: Who Can Apply for an MCA?

At Sunwise Capital, our mission is to help businesses find a financing option that suits their unique needs. Virtually any business with consistent daily or monthly credit card sales is eligible. This includes, but is not limited to, restaurants, dry cleaners, medical practices, hotels, and more. The key is that your business should have a steady flow of credit card transactions, as MCAs are based on your future sales.

What Exactly is a Merchant Cash Advance?

An MCA is essentially an unsecured funding mechanism grounded in your future credit and debit card sales. A one-time fee or factor rate is applied to the amount advanced, and repayments typically occur within a 3- to 12-month window. However, it’s essential to be aware that MCAs come with their own set of risks.

Potential Risks: What Should You Know?

While MCAs offer fast access to capital, there are risks involved. For instance, a default could negatively affect your business credit score and limit future financing options. It’s imperative to understand the terms and conditions fully before proceeding.

Is an MCA a Viable Alternative Financing Option?

Absolutely. MCAs provide immediate cash flow, enabling you to meet various business needs such as inventory procurement, bill payments, and staffing. The application process is streamlined and entirely online, with approvals taking mere minutes and funds deposited directly into your bank account often within hours.

Credit Requirements: How Does Credit Score Factor In?

MCAs are more lenient when it comes to credit scores; the focus is more on your business performance. Unlike traditional loans, which may take weeks to months to process, an MCA from Sunwise Capital allows you to access funds almost instantly, irrespective of your credit history.

How to Estimate MCA Costs: The Role of Calculators

Utilizing a merchant cash advance calculator can greatly assist in understanding the costs and repayment structure of an MCA. By entering essential variables like the advance amount, factor rate, and daily credit card sales, you can gain insights into daily payments, duration of repayments, and the overall cost.

How Does the Repayment Structure of an MCA Work?

MCAs aren’t debts; they’re advances against future sales. Payments are generally deducted daily or weekly directly from your transactions. For daily repayments, no grace period usually exists; repayments commence the day following the disbursement. Additionally, a ‘holdback’ percentage, generally between 10% and 20% of daily credit sales, is deducted as part of the repayment.

What Key Variables Should I Consider for MCA Calculations?

To estimate the specifics of your MCA repayment, you will need:

  • Advance amount
  • Factor rate (as a decimal)
  • Additional fees (if any)
  • Average daily or monthly credit card sales
  • Holdback percentage

These variables help you ascertain daily payments, repayment duration, and the total repayment amount.

What Do I Need to Apply for an MCA?

The application is straightforward. Be prepared to submit a one-page application form and three months of bank statements to provide proof of your monthly revenue.

Is an MCA Right for Your Business?

MCAs can be an expedient solution for addressing short-term cash flow challenges or for undertaking short-lived projects, like inventory purchases. They are not loans but rather a way to secure quick funding based on future sales.

How Can I Successfully Exit an MCA Agreement?

If you find yourself in an MCA loop, consider the following options:

  • Refinance with a traditional term loan.
  • Leverage assets for an asset-based loan.
  • Renegotiate terms.
  • Consolidate existing advances into one loan.

What Are the Consequences of Defaulting on an MCA?

A default will not only dent your business credit score but could also result in a loss of future financing options. Though most MCA providers don’t require a personal guarantee, defaulting may lead them to seek asset seizures if a personal guarantee was in place.

What Are Some Alternative Financing Options to MCAs?

If an MCA isn’t a good fit for your business, various other financing avenues are available. These range from short-term and long-term loans to alternative lending solutions, even for those with less-than-stellar credit histories.

Navigating the MCA Maze: Your Roadmap to Smart Financing Choices

As we’ve explored, merchant cash advances (MCAs) offer a viable and quick financial solution for retailers in need of immediate funding. From simplified application processes to flexible repayment terms, MCAs provide a unique avenue for obtaining working capital. They come in especially handy for businesses with fluctuating revenues or those unable to secure traditional loans.

However, it’s crucial to approach this form of financing with eyes wide open. MCAs can have high fees and less regulatory oversight compared to conventional loans. Therefore, understanding the intricacies of the MCA repayment structure, being aware of the key variables in calculations, and scrutinizing contracts can protect you from potential pitfalls. And if you ever find yourself needing to exit an MCA agreement, knowing your options can be a lifesaver.

Before you dive headfirst into an MCA, be sure to explore alternative financing options, especially if your business has a less-than-stellar credit history. It’s always best to make well-informed decisions tailored to your specific needs and long-term business objectives.

So, is a merchant cash advance right for your retail business? That ultimately depends on your unique circumstances. However, given the benefits and the capacity to mitigate risks through proper planning, MCAs certainly merit consideration in your overall business financing toolkit.

If you’re considering an MCA or any other type of business financing, why not consult with experts who can guide you through your options? At Sunwise Capital, we specialize in helping businesses like yours find the perfect financing solution tailored to your needs. Feel free to contact us for a personalized consultation today.


Mark J. Kane is a successful entrepreneur spending the last 16 years lending money to business owners. Beginning his career as a psychologist, at the age of 23 he became the youngest Hospital Admin running a 100+ bed facility. He built two businesses to over 500 employees and a business from scratch to over $18M in revenue in 18 months before selling. This experience led him to begin Sunwise Capital.

Category: Advice, Getting Money

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