MERCHANT CASH ADVANCES
A merchant cash advance (MCA) is a type of financing that provides businesses with a lump sum of capital in exchange for a percentage of their future sales. MCAs are commonly used by small and medium-sized businesses that need quick access to funds and may not qualify for traditional loans. Here are the key features and characteristics of a merchant cash advance:
Lump Sum Funding: The business receives a one-time lump sum of cash upfront. This amount is typically based on the business’s average monthly credit card sales or total sales volume.
Repayment through Future Sales: Repayment is made by taking a fixed percentage of the business’s daily credit card sales or total sales until the advance, plus fees, is fully repaid. This method of repayment aligns with the business's cash flow, with payments fluctuating based on sales volume.
Factor Rate: The cost of the MCA is determined by a factor rate, which is a multiplier applied to the advance amount. Factor rates usually range from 1.1 to 1.5, meaning if a business receives a $10,000 advance with a factor rate of 1.2, they would repay $12,000.
No Fixed Term: Unlike traditional loans with fixed monthly payments and terms, MCAs have no set repayment term. The time it takes to repay the advance depends on the business’s sales volume.
Quick Access to Funds: MCAs are known for their fast approval and funding process. Businesses can often receive funds within a few days of application.
Minimal Credit Requirements: MCAs typically have less stringent credit requirements compared to traditional loans. Approval is primarily based on the business’s sales performance rather than its credit score.
Flexible Use of Funds: Businesses can use the funds from an MCA for various purposes, such as purchasing inventory, covering operational expenses, or handling emergencies.
High Cost: MCAs can be more expensive than traditional financing options due to the high factor rates and fees. The effective annual percentage rate (APR) can be significantly higher than that of conventional loans.
Daily or Weekly Payments: Repayments are usually made daily or weekly, deducted automatically from the business’s credit card processing or bank account.
Industry Suitability: MCAs are particularly popular among businesses with high credit card sales volumes, such as retail stores, restaurants, and service providers.
Process of Obtaining a Merchant Cash Advance:
Application: The business applies for an MCA by providing information about its sales history and financial performance.
Approval: The MCA provider evaluates the application and determines the advance amount and factor rate based on the business’s sales.
Agreement: Once approved, the business signs an agreement outlining the terms of the advance, including the percentage of future sales to be withheld and the total repayment amount.
Funding: The business receives the lump sum payment, which is deposited into its bank account.
Repayment: A percentage of the business’s daily credit card sales or total sales is automatically deducted and applied towards repaying the advance until the total repayment amount is met.
Advantages of Merchant Cash Advances:
Speed: Quick access to funds.
Flexibility: Repayments adjust with sales volume.
Lower Credit Requirements: Easier approval process for businesses with poor credit or limited credit history.
Disadvantages of Merchant Cash Advances:
High Cost: Expensive compared to traditional financing.
Frequent Repayments: Daily or weekly payments can strain cash flow.
No Improvement in Credit Score: Payments typically do not get reported to credit bureaus, so they don’t help build business credit.
Merchant cash advances offer a viable option for businesses needing quick and flexible financing, but they come with higher costs and frequent repayment obligations. Businesses should carefully consider their ability to sustain the cash flow required to repay the advance before opting for an MCA.