For small businesses, securing capital is paramount, yet the traditional financing avenues often pose challenges due to limited options and intricate application processes. The good news is that online lenders present alternative solutions like merchant cash advances (MCAs) and this has become a popular choice for small merchants. These MCAs serve as a lifeline for businesses seeking swift access to working capital, bypassing the complexities of traditional loan applications.
If you find yourself contemplating a merchant cash advance, here are some essential MCAs that you should know. Let’s start with understanding its meaning.
Understanding Merchant Cash Advance
In a MCA, a company acquires a lump sum payment in exchange for committing to fixed monthly payments in the future. Positioned within the revenue-based and receivables financing, these methods emerge as the most founder-friendly means for startups to propel their growth, devoid of dilution or debt. While historically associated with traditional “main street” retailers, MCAs can prove fitting for rapidly expanding tech companies.
Tailored for businesses in urgent need of immediate capital, bypassing the conventional 2-3 month process of venture capital or venture debt, MCAs serve as a swift financing solution. This form of funding is instrumental in addressing cash-flow shortages, handling various short-term expenses, and catalyzing a startup’s growth to enhance its business fundamentals.
MCAs, strictly speaking, deviate from the traditional concept of loans. In this arrangement, MCA providers acquire your future sales at a discounted rate, and you proceed to repay this sum over a predetermined period. The distinction arises from the specific position they occupy within the capital structure, notably below securitized debt, which places them outside the conventional loan category.
The Mechanics Of Merchant Cash Advance
When a small business faces a critical need for funding, obtaining it can be a challenging ordeal. Traditional lenders, like banks, often subject applicants to prolonged approval processes, and securing an ideal business credit card may demand a good to excellent credit history of above 650.
This is where the MCA steps in as an advantageous alternative. The MCA evaluates the business’s past debit and credit card sales, utilizing this data to offer an advance against future sales. Notably, the funding process is often swift.
Upon approval, repayments are typically deducted from your merchant account or bank account through a daily (or occasionally weekly) direct debit. Some MCAs structure payments based on your business’s sales, adjusting the payment amount when sales fluctuate. This flexibility proves beneficial for managing cash flow effectively.
It’s imperative to assess the consistency of your cash flow and ensure that your merchant account maintains sufficient funds each day to meet the periodic payment requirements.
Fees And Charges Related To MCAs
MCA companies employ a distinct approach to pricing, eschewing traditional interest rates in favor of factor rates. These factor rates, typically falling within the range of 1.1 to 1.5, hinge on the provider’s evaluation of your business.
Several factors come into play when determining the factor rate you’ll receive, including your industry, years in operation, business financials, debit and credit card transactions, and personal credit score. Businesses perceived as having a riskier ability to repay are likely to encounter higher factor rates, translating to elevated fees.
It’s crucial to note that the factor rate does not have any extra fees that the MCA company might impose, such as administrative or underwriting fees. These additional charges contribute to the overall cost of your financing. Thus, a comprehensive understanding of both factor rates and associated fees is imperative.
Pros And Cons Of MCAs
Pros of MCAs
● The primary advantage of opting for an MCA lies in the expeditious accessibility of funds essential for your business needs. Whether you have a specific project or improvement in mind for your small business, an MCA provides a prompt avenue to secure the required finances.
● Unlike traditional loans, collateral isn’t a prerequisite for an MCA, alleviating concerns related to asset backing. Additionally, the emphasis on your credit score is comparatively lenient. While the lender assesses your credit score, MCAs display a more forgiving stance toward businesses with moderate or poor credit histories.
● Furthermore, MCA lenders offer increased flexibility in payment options. During periods of sluggish sales, adjustments to the daily holdback of transactions can be negotiated, providing businesses with adaptable repayment structures. This flexibility is particularly beneficial for navigating through varying sales cycles and ensuring a more manageable financial commitment.
Cons of MCAs
● The incorporation of factor (additional fee) in the payback amount can be detrimental during periods of lower sales. The elevated payback amount, influenced by this factor, may outweigh the benefits, potentially eroding essential profits. This additional cost could pose a challenge, particularly when faced with fluctuating sales.
● A significant drawback arises from the lack of regulation in the MCA arena, leading to higher factors compared to the interest on traditional bank loans. This heightened factor poses a potential risk, especially if the owed amount surpasses your financial capacity. Unlike traditional loans, MCAs typically have shorter payback periods, intensifying the pressure on timely repayments.
● In essence, the lack of regulatory oversight and the structure of payback terms make it essential for businesses to carefully weigh the potential disadvantages of opting for an MCA.
Typical Terms of a MCA Financing
Diverging from the conventional structure of business loans, MCAs prioritize cash flow over good business credit or collateral. This distinctive approach streamlines the terms, ensuring a swift and straightforward application process, often resulting in funding within a day or two. While most MCAs share common terms, it’s crucial to scrutinize the agreement presented by your MCA provider. Here’s a breakdown of the typical terms:
● Principal: This denotes the amount you are obligated to repay, with figures ranging from a few thousand dollars to potentially hundreds of millions.
● Discount Rate: It is calculated as a percentage representing the “charge” levied by the MCA provider. For instance, if you receive $475,000 and owe $500,000 back, the discount rate is 5%.
● Payment Period: This stipulates the repayment duration, ranging from three months to two years.
● Payment Frequency: Typically conducted on a monthly or weekly basis, payment frequency defines how often you are required to make repayments.
The simplicity and speed associated with the MCA process underscore its appeal, offering businesses a quick injection of capital based on the rhythm of their cash flow.
Is MCA Financing Right For You?
When contemplating the suitability of an MCA for your business, several key factors demand consideration. It’s imperative to evaluate the eligibility criteria, your business’s capacity to meet payments based on its credit sales, and terms before opting for funding.
Initially, for SMBs to qualify for an MCA, they must possess accounts receivable, such as credit or debit card sales and invoices.
MCAs are specifically crafted to offer businesses flexible and prompt access to working capital. Their adaptability lies in the allowance for variable payments contingent on business receivables. Ideally, these advances cater to businesses characterized by seasonality, substantial credit card sales, or a plethora of receivables, seeking swift access to working capital.
While MCAs generally streamline the application and qualification process, it’s crucial to bear in mind that they involve variable payments.
Numerous small business funding entities consider personal or business credit as a factor in evaluating applications. Nevertheless, credit is not the sole determinant of eligibility. Alternative SMBs assess the overall business performance, taking into account factors such as time in operation, business revenue, business credit history, and accounts receivable. This implies that even with a bad credit score, your small business could still qualify for a cash advance. However, the credit score does influence the terms of your funding agreement, with a higher score potentially leading to more favorable terms.
Step By Step Process To Get Quick Financing With MCA
Acquiring an MCA is a straightforward process, accessible to most businesses that accept credit and debit card payments. Factors like credit history, years in operation, or high-value assets often do not act as disqualifiers. The application itself is swift, taking only a few minutes, and most providers boast relatively quick turnaround times. Here are steps to guide you through the application for a MCA.
● Step 1: Conduct Thorough Research
Critical to the process is comparing fees and factor rates among various MCA providers. Prominent options such as Credibly, Expansion Capital Group, Fora Financial, and Libertas Funding should be considered.
Review their eligibility requirements carefully to gauge the likelihood of your application being approved.
● Step 2: Establish Credit Card Processing
Securing approval for your card processing is pivotal in enhancing your eligibility for a MCA. The lender will seamlessly deduct payments through your credit card processor.
If you’re already engaged with a specific company, investigate whether it maintains a working relationship with the MCA lenders you’re interested in. Alternatively, it’s entirely acceptable to proceed to the next step and transition to a credit card processor accepted by your lender once your advance is approved.
● Step 3: Initiate the Advance Application
MCA lenders predominantly operate online, facilitating swift access to their application forms. Completing these forms involves providing basic information such as your EIN, Social Security details, and business type.
● Step 4: Submit Required Documentation for MCA Approval
The subsequent phase involves submitting essential paperwork that verifies your request for a cash advance. Alongside documents outlining your business structure, you’ll need to furnish bank account and card processing statements.
Gathering financial statements is relatively straightforward if you maintain an online business checking account. Additional documents projecting your annual business income and estimated income growth over the next 12 months might be required depending on your chosen lender. The aim is transparency about your sales and cash flow, allowing the lender to assess the risk associated with lending to you.
MCA lenders vary in their processing times. While some can greenlight your advance within a few hours, others may take between 24 and 72 hours to deposit the funds into your account. Typically, businesses with online accounts experience faster access to their funds.
● Step 5: Scrutinize the MCA Contract
Upon approval of your MCA, you’ll receive a finalized financing contract. Thoroughly review all details, paying attention to potential penalties in case of default. Feel free to seek clarification or ask questions if any part of the contract appears confusing.
If everything aligns with your expectations, it’s time to affix your signature, signaling your acceptance of the terms, and receive the upfront lump sum. The lender will deposit the advance into your small business bank account, where agreed daily deductions will occur automatically.
Exploring Alternatives to Merchant Cash Advances
Looking beyond merchant cash advances, several alternatives cater to diverse business financing needs:
● Online Small Business Loans: Online lenders offer both short- and long-term business loans, often requiring collateral. The interest rate tends to decrease with shorter loan terms.
● Business Cash Advance: Unlike revenue-based merchant cash advances, business cash advances rely on your cash flow. They feature a fixed payment term and generally boast lower interest rates compared to merchant cash advances.
● Receivables Factoring: This involves selling individual invoices at a discount to investors, providing immediate access to cash rather than waiting for customers to pay. Repayment occurs over a fixed period, similar to merchant cash advances.
● Receivables Financing: In this option, investors provide capital based on the value of your receivables without taking ownership. Repayment follows a fixed period, resembling the structure of merchant cash advances.
Each alternative offers distinct advantages, allowing businesses to tailor their financing approach to align with specific requirements and preferences.
Conclusion
Navigating the world of business financing is no easy task and MCAs are becoming an invaluable tool for those who need quick access to working capital. MCAs have a structure that focuses on sales rather than traditional loan aspects, which allows for flexibility and speed in addressing immediate financial needs.
While MCAs provide funding it’s important to consider the advantages and disadvantages taking into account factors such, as fees, repayment terms, and alternative options. Having an understanding of the MCA process empowers businesses to make informed decisions and approach their financial requirements strategically.
Frequently Asked Questions
Q: What does a quick cash advance entail?
In essence, a quick cash advance is a form of short-term loan that enables prompt access to funds from a bank or other financial institution. This option proves beneficial when there’s an urgent need for cash, and the required funds aren’t readily available in your checking account.
Q: Does a merchant cash advance impact business credit?
A merchant cash advance does not contribute to building business credit because it doesn’t function as a traditional loan, and providers typically do not report repayment history to business credit bureaus.
Q: What are the consequences of being unable to repay a cash advance?
Failing to repay a cash advance results in persistent efforts to collect the owed amount. This can lead to stress and, if the collection attempts are continual, may adversely affect your credit report. Such negative entries on your credit report can have a detrimental impact on your credit standing and limit your financing options.
