The world isn’t always convenient for the little people; time and money are assets many small businesses get deprived of. And with massive interest rates, bad credit scores, and risky collateral deals, turning to bank loans won’t cut it for everyone.
Merchant Cash Advances eliminate these risks associated with financing options by forfeiting a portion of the future profit for immediate working capital without the constraints of qualifying for a loan.
What Is a Merchant Cash Advance?
Think of Merchant Cash Advances (MCAs) as somewhat of a “get out of jail free card” for small business owners – though it isn’t actually free, and there are a few risks involved.
MCAs are a way to gain instant access to sums of liquid money in exchange for a percentage of a business’s future daily sales. Unlike traditional bank loans that charge a percentage of interest per payment, MCAs get calculated by a set factor rate and don’t accrue interest over time.
The repayment terms and qualification minimums are typically much more lenient than that of bank loans, though small business owners should consider some factors:
Higher APRs
Struggling businesses often use Merchant Cash Advances, so some lenders charge much higher factor rates to compensate for the risk they are taking. These higher Annual Percentage Rates (APR) reduce the loss for the lender if the business fails and can potentially cause higher APRs for the company.
Credit Scores
While MCAs allow access to individuals with low credit scores, they don’t help build credit once they are in place, which may inhibit a business’s ability to take loans in the future.
How a Merchant Cash Advance Works
Paying off MCAs is similar to paying loans and lines of credit. However, there are a few discrepancies, such as how they get calculated and when borrowers pay them off.
Calculating the Cost of MCAs
A factor rate formula calculates Merchant Cash Advances. This formula is the total capital advanced x the factor rate.
(Note: according to the financial firm NerdWallet, factor rates for MCAs usually fall between 1.2 and 1.5)
A risk assessment determines the factor rate of a business. This assessment relies on numerous factors such as sales history, cumulative debt, credit scores, and projected profit.
Say a small restaurant catches fire and needs $25,000 for immediate repairs. An MCA lender determines that their factor rate would be 1.3. So, $25,000 x 1.3 is a total amount of $32,000 (this doesn’t include any other fees such as administrative fees).
When Are MCAs Paid?
While it is required for individuals to make loan and credit card payments once a month, borrowers can pay towards MCAs in two different ways:
Percentage of Credit Card or Debit Card Sales
A lender can take a fixed percentage of each credit/debit card sale a business makes.
The amount of time it takes to pay off an MCA with a percentage of debit or credit card sales depends on how many sales a business makes over time.
Fixed Payments
Businesses can also pay MCAs via daily or weekly fixed payments. Since this isn’t contingent upon the success of a company’s profit, the amount of time it takes to pay off doesn’t fluctuate.
Who Can Benefit From Merchant Cash Advances?
MCAs are a valid alternative for financing small businesses that don’t have the luxury of taking a loan or using a line of credit. Businesses that may benefit from taking an MCA are:
- Struggling businesses
- Thriving businesses
- Seasonal businesses
- Businesses with unexpected expenses
Struggling Businesses
Sometimes businesses fall onto hard times and need an extra push to get back on their feet. Many of these businesses don’t have the credit scores or the sales history to get a bank-issued loan, so they turn to MCAs.
Thriving Businesses
Businesses don’t only use MCAs on the cusp of bankruptcy; small businesses that are flourishing may benefit from using them as well. Since the factor rates determine the risk assessment, a successful business will have a much lower total cost and could potentially save more money than if it were to use a loan.
Seasonal Businesses
A Christmas store will be much more profitable in December than July, which is where repayments inverse to sales become a better alternative to loans.
Unexpected Expenses
Expenses can arise at any time. However, sometimes small businesses need money immediately and can’t afford to lose time on application processes before receiving a loan, making MCAs a good alternative since they usually are attained between 1 and 3 days.
Apply Now and Receive Up-Front Funds Within 24 Hours
Do you need access to business capital now?
Apply now to find out how much you can borrow, and get access to a Merchant Cash Advance in your bank account within the next 24 hours if you qualify.
Requirements
- In business for a minimum of 3 months
- 1 Page Application
- Last 3 months of bank statements (All pages)
- Last 3 months of CC Processing statements (All pages)
- And other information is required after accepting a pre-approved offer.
Related Service
ACH Programs
A merchant cash advance is a business cash advance program that provides you with capital by purchasing your future credit/debit card sales.
Merchant Processing Accounts
Looking for a Merchant Processing Account? Look no further! We work with a variety of different Merchant Processing companies to service your customers.
Franchise Financing
Our Franchise Financing Program allows you to obtain the capital you need for cash flow, upgrades, renovations, expansion, or anything you see fit.