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What is Merchant Cash Advance and how does it work?
A merchant cash advance (MCA), or merchant loan, is a type of short-term financing option available to businesses. In a merchant loan, the lender issues a lump sum of cash to the business, backed by future sales. The loan is repaid with regular payments that are calculated using a percentage of credit card or debit card sales. Merchant cash advances are not actually small business loans, but commercial agreements where the borrower sells future credit card sales to the funding provider.
Payments are made until the agreed amount is paid in full, so the length or duration of the transaction depends on the amount sold and the amount borrowed. Typically, a merchant loan will be repaid in less than a year, but many lenders are willing to offer more flexible terms. Merchant loans can include customized financing structures where there is no fixed repayment term, but payments are part of a monthly or daily sales holdback. Instead of charging financing costs through interest rates, MCA providers use factor rates, which determine the percentage of sales they collect for repayment. Advances are paid with daily, weekly, bi-monthly or monthly payments.
Merchant advances are secured by the business’s future debit or credit card sales, so they are less risky for lenders and a great option for businesses that may have been turned off while applying for other financing options. Are. Lenders that offer merchant cash advances work with businesses that have both good credit and bad credit. Since the future sale secures the advance, there is no need to provide collateral or personal guarantees.
Advantages and Disadvantages of a Merchant Cash Advance
Every personal loan or business financing arrangement has both advantages and disadvantages. Merchant cash advances are no different. There are many advantages to using an MCA to finance your business, but the weight of the disadvantages varies for each type of business and individual entrepreneur’s preferences.
MCA: Professional
Fast Funding – Merchant cash advances provide quick funding to approved borrowers. The application process for MCA is simple and generally available online, which speeds up the approval process. Because MCAs are not like traditional bank loans, most merchant loan companies or online lenders can get borrowers funded within 1 to 3 business days of applying. This can be helpful for small business owners who need immediate working capital or operate in an industry with fluctuating regular cash flows.
Better Approval Chances The underwriting process for cash advances does not depend as heavily on creditworthiness as other financing applications. In fact, most MCA borrowers are not required to have a good credit score or provide credit report Absolutely. This is most useful for businesses that may have poor credit or startup entrepreneurs who have not yet established a good business credit history. While lenders may request documentation including financial statements showing monthly revenue, income tax returns, personal credit scores and business bank account statements, qualification for the MCA is based on sales records and business plans.
Flexible Payments – Once the business owner is approved for the merchant cash advance and the factor rate is determined, payment will be taken from credit card sales as per a predetermined schedule. Since the payment amount is determined on a percentage of future sales, the amount payable is less when sales are lower than expected. In periods where sales exceed expectations, payments are higher, so the loan is paid off faster.
MCA: Cons
financing cost Merchant cash advances are a more expensive financing option than term loans or SBA loans. The annual percentage rate (APR) for an MCA can be as high as 350% depending on the lender, amount advanced, factor rate, origination fee, creditworthiness, and business income. Unlike traditional loan interest rates and fees, factor rates make it more difficult to figure out how much an MCA will cost you. Since payments are set as a percentage of sales, cash advance borrowers do not benefit from paying off the loan early, even though there is no formal prepayment penalty.
confusing repayment terms MCA borrowers often find the loan agreement and initial paperwork very confusing. This is especially true when it comes to factor rates and repayment programs that are based on a percentage of your daily sales. Merchant cash advance companies usually do not provide annual percentage rates in their agreements. This factor makes it challenging to compare MCAs with other types of small business financing.
lack of regulation Unlike traditional forms of financing, business cash advances, which are considered commercial transactions, are not subject to federal regulations. uniform Commercial Code Controlled by the MCA of each state. This limited regulation has often led businesses to become victims of bad actors who take advantage of questionable marketing and sales tactics that lure people into bad deals. There is also a risk in providing documents and confidential information, such as bank details and social security numbers, to unregulated merchant companies.
7 Types of Businesses Merchant Cash Advances Can Use
Almost any type of small business can consider a merchant cash advance as a source of capital, but MCAs are most often used by businesses that:
- Accept payment through Credit Card or Debit Card – MCA is repaid through a pre-determined repayment schedule, but the money is taken from credit or debit card sales.
- Not having a good credit history New businesses or small businesses without good credit can get approved for a merchant cash advance without a hefty down payment or collateral.
- Need cash urgently Merchant cash advance funds as fast as the same day for some applicants.
- sales are increasing– Merchant loans are good for growing businesses when their sales are on an upward trajectory, allowing the loan to be paid off quicker as credit card revenue increases.
While the list of exact businesses that can use an MCA is limitless, the following list gives examples of some businesses that can benefit most from cash advance financing arrangements.
restaurant
All types of restaurant owners make great candidates for merchant cash advances, including dine-in restaurants, food trucks, franchised fast-food restaurants, cafes, pizza delivery shops, and more. The two primary reasons why MCAs work well for those in the food and beverage world are that a large percentage of a restaurant’s annual revenue comes from credit card sales and that the industry has seasonal fluctuations in cash flow. Known for. To cover operating expenses during slow months, business owners can rely on marketing strategies, layoffs and financing options such as merchant cash advances.
retail outlets
Like restaurants, retail business owners collect a lot of their revenue through credit card transactions. They also experience fluctuations in sales volume due to seasons, holidays, location, inflation and the type of merchandise. Retailers can supplement working capital during slow times by turning to merchant cash advance providers or use cash advances to lower operating expenses by purchasing inventory in bulk.
travel agencies
Vacation planning companies and travel agents can use merchant cash advances to keep business running during periods of low revenue. The tourism and travel industry is heavily dependent on other factors such as recession threats, weather, major events and natural disasters. Since businesses can fluctuate, MCAs allow travel agents to continue to network, purchase pre-sale holiday rates, and cover advertising costs even when sales are low.
hotel
Similar to travel agencies, owning a hotel, ski lodge, resort, bread and breakfast (B&B), beach condo, or mountain cabin company can be a very inconsistent source of revenue. However, unlike travel agents, hotels’ operating costs are not as low when business is slow. A cash advance can help hotel and lodge owners pay utility bills, cover salaries and wages, and make monthly mortgage payments.
Seasonal Domestic Services
Entrepreneurs who have small businesses that are in demand only during certain seasons also use MCA to supplement working capital during the off-season. Some of these seasonal services include landscaping, pool cleaning and repair, snow removal, and swim schools.
e-commerce store
E-commerce businesses have become more and more popular in the last decade. This is partly due to technological advances and social trends. Many entrepreneurs create separate online stores to sell their own products or profit from affiliate marketing arrangements. Merchant cash advances can be used to purchase supplies or inventory, pay for web development costs, or launch marketing campaigns on social media.
Salon & Spa
Any business owner of a hair salon, nail service shop, spa, barbershop, or other beauty service provider can benefit from the MCA. Most salon customers pay for their services using credit cards or debit cards, so it is simple for these business owners to arrange a cash advance repayment plan. Proceeds from the financing agreement can be used for renovation, expansion, startup costs or operating expenses.
alternative business financing options
If the total cost of an MCA concerns you or your business doesn’t yet have the sales volume to make a merchant cash advance work, you may want to consider other funding options. There are many types of traditional bank loans or alternative financing options to consider. Many entrepreneurs, like this software developer, prefer to work with an alternative lender like Biz2Credit instead of a traditional lender because they offer more diverse loan options and a convenient online application process.
invoice factoring
Invoice factoring is another type of financing arrangement where a business’s receivables are collateralized on a lump sum payment delivered in advance to the borrower. With invoice factoring, enterprising businesses can sell their unpaid invoices to a factoring company to secure a cash advance.
Term loan
A term loan is a traditional type of financing where the borrower receives a lump sum payment upfront and then repays the loan over time. Term loans can be short-term loans or long-term and can be unsecured loans or secured loans, which require collateral. The financing cost of a term loan includes interest, which is determined based on the creditworthiness of the borrower.
sba loan
US Small Business Administration Facilitates several loan programs where they partially guarantee a percentage of the funds for approved borrowers. SBA loans offer low-interest loans with lower down payments than traditional bank loans, but they have stricter requirements and require a deposit business plan, The most common SBA loans for new business owners are SBA 7(a) loans and SBA microloans.
lines of credit
With a business line of credit, the borrower is approved for a maximum line of credit through an online lender, bank or credit union. They can withdraw cash at any time as long as it is available. Payments on a credit line are made up of principal and interest, which is calculated only on the amount of money currently drawn.
ground level
Merchant cash advances are a great financing resource for business owners collecting credit card and debit card payments. A cash advance works where the borrower sells his future card sales to the merchant cash advance provider in exchange for the cash advance. MCAs offer borrowers faster funding and flexible eligibility requirements, but they have higher financing costs than other loan options. If you are interested in exploring some great funding options for your business including MCA, contact Biz2Credit today.
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