What is a Merchant Cash Advance?
A merchant cash advance (MCA) is a type of business financing that provides businesses with a lump sum of cash upfront in exchange for a percentage of their future credit card or debit card sales. Unlike traditional business loans, MCAs are not based on the borrower’s creditworthiness, but rather on the business’s sales volume and future revenue potential.
The way an MCA works is that the provider, or funder, advances a certain amount of money to the business owner, and in return, the business owner agrees to repay the advance through a percentage of their daily credit and debit card sales. This means that the repayment amount fluctuates based on the business’s sales, making it a flexible and potentially attractive option for businesses that experience variable income or seasonal fluctuations.
How Does a Merchant Cash Advance Work?
The process of obtaining a merchant cash advance typically involves the following steps:
- Application: The business owner submits an application to the MCA provider, providing information about their business, sales, and financial history.
- Underwriting: The MCA provider evaluates the business’s creditworthiness, sales volume, and other factors to determine the amount of the advance and the percentage of future sales that will be used for repayment.
- Funding: If approved, the MCA provider advances the lump sum of cash to the business owner, typically within a couple business days.
- Repayment: The business owner repays the advance by allowing the MCA provider to automatically deduct a percentage of their daily credit and debit card sales until the full amount, plus any fees, is repaid.
The repayment percentage and total cost of the MCA can vary depending on the provider, the amount of the advance, and the business’s sales volume and creditworthiness.
Benefits of a Merchant Cash Advance
There are several potential benefits to using a merchant cash advance for your business:
- Rapid Funding: MCA providers can often approve and fund a cash advance within a few business days, much faster than traditional bank loans or other financing options.
- Flexible Repayment: The repayment of an MCA is based on a percentage of your daily credit and debit card sales, which means the amount you pay back each day fluctuates with your revenue. This can be particularly beneficial for businesses with variable or seasonal income.
- No Collateral Required: Unlike a traditional business loan, an MCA does not require the business owner to pledge any personal or business assets as collateral.
- Easier Qualification: MCA providers often have more lenient qualification criteria than banks, focusing more on the business’s sales volume and potential rather than its credit history or assets.
- Preservation of Equity: By obtaining an MCA, business owners can avoid diluting their ownership or taking on additional debt, which can be important for maintaining control and flexibility in their business.
Is a Merchant Cash Advance Right for Your Business?
Determining whether a merchant cash advance is the right financing option for your business depends on several factors, including:
- Cash Flow: If your business experiences variable or seasonal cash flow, an MCA may be a better fit than a traditional loan with fixed monthly payments.
- Credit History: If your business has a limited or poor credit history, an MCA may be more accessible than a bank loan or other financing options.
- Growth Plans: If you need quick access to capital to seize a growth opportunity or cover unexpected expenses, an MCA can provide the necessary funds.
- Repayment Ability: Consider whether your business can comfortably afford the daily or weekly repayment deductions from your credit and debit card sales.
It’s important to carefully evaluate the terms, fees, and repayment structure of any MCA offer to ensure it aligns with your business’s needs and financial capabilities.
How to Qualify for a Merchant Cash Advance
To qualify for a merchant cash advance, businesses typically need to meet the following criteria:
- Minimum Monthly Sales: Most MCA providers require a minimum of $15,000 to $20,000 in monthly revenue.
- Time in Business: Businesses often need to have been operating for at least 6 months to 1 year to be eligible for an MCA.
- Acceptable Credit History: While MCA providers may be more lenient than banks, they still consider the business’s credit history and may have minimum credit score requirements.
- Positive Cash Flow: The MCA provider will assess the business’s overall financial health, including its profitability and ability to repay the advance.
It’s important to note that the specific qualification criteria may vary between different MCA providers, so it’s a good idea to shop around and compare offers to find the best fit for your business.
The Application Process for a Merchant Cash Advance
The application process for a merchant cash advance typically involves the following steps:
- Initial Inquiry: The business owner contacts the MCA provider and provides basic information about their business, such as the industry, location, and sales volume.
- Application Submission: The business owner completes a more detailed application, which may include providing financial statements, bank statements, and other supporting documentation.
- Underwriting: The MCA provider reviews the application and supporting documents to assess the business’s creditworthiness, sales volume, and repayment ability.
- Approval: If the business is approved, the MCA provider will provide the terms of the advance, including the amount, repayment percentage, and any fees.
- Funding: Once the business owner accepts the terms, the MCA provider will transfer the lump sum of cash to the business’s bank account, typically within a few business days.
The application process can vary in length, depending on the MCA provider and the complexity of the business’s financial situation. It’s important to be prepared with all the necessary documentation to streamline the process.
Repayment Options for a Merchant Cash Advance
The repayment of a merchant cash advance is typically structured as a percentage of the business’s daily credit and debit card sales. This means that the amount the business pays back each day fluctuates based on its sales volume.
For example, if the MCA provider’s repayment percentage is set at 10%, and the business has $1,000 in daily credit and debit card sales, the business would pay $100 (10% of $1,000) towards the advance that day. If the next day’s sales are $800, the repayment would be $80 (10% of $800).
Some MCA providers may also offer alternative repayment options, such as:
- Fixed Daily or Weekly Payments: The business makes a predetermined payment, regardless of its sales volume.
- Automated Clearing House (ACH) Payments: The MCA provider automatically withdraws a fixed amount from the business’s bank account on a regular schedule.
It’s important to carefully review the repayment terms and understand the potential impact on your business’s cash flow before signing an MCA agreement.
Alternatives to a Merchant Cash Advance
While a merchant cash advance can be a useful financing option for some businesses, it’s not the only solution available. Some alternatives to consider include:
- Traditional Business Loans: Banks, credit unions, and alternative funders may offer term loans or lines of credit with fixed rates and repayment schedules.
- Small Business Administration (SBA) Loans: The SBA provides several loan programs, such as the 7(a) and 504 loans, which may offer more favorable terms than traditional business loans.
- Invoice Factoring: This involves selling your outstanding invoices to a factoring company in exchange for a lump sum of cash, typically at a discounted rate.
- Equipment Financing: Businesses can obtain financing specifically for the purchase of equipment, which may be a more cost-effective option than an MCA.
- Business Credit Cards: Credit cards can provide access to working capital, with the added benefit of building business credit.
When considering alternatives to a merchant cash advance, it’s important to carefully evaluate the terms, fees, and impact on your business’s cash flow and long-term financial health.
Common Misconceptions about Merchant Cash Advances
There are several common misconceptions about merchant cash advances that are worth addressing:
- MCAs are too expensive: While MCAs may have higher overall costs than traditional loans, the flexible repayment structure and faster funding can make them a viable option for businesses with variable cash flow.
- MCAs are only for businesses in trouble: MCAs are used by a wide range of businesses, including those that are growing and seeking to capitalize on new opportunities.
- MCAs are not regulated: MCA providers are subject to various federal and state regulations, and the industry has seen increased oversight in recent years.
- MCAs are a last resort: Many businesses use MCAs as a strategic financing tool to support their growth and operations, not just as a last resort.
- MCAs require collateral: Unlike traditional loans, MCAs do not typically require the business owner to pledge personal or business assets as collateral.
It’s important to research and understand the realities of merchant cash advances before deciding if they are the right financing option for your business.
Conclusion
Merchant cash advances can be a valuable financing tool for businesses that need quick access to capital and have variable cash flow. By understanding how MCAs work, the potential benefits, and the qualification and application process, you can make an informed decision about whether this type of financing is right for your business.
Remember, as with any financial decision, it’s crucial to carefully review the terms and conditions of any MCA offer and consider how it will impact your business’s long-term financial health. By doing your due diligence, you can leverage the benefits of a merchant cash advance to support your business’s growth and success.
