What Is a Merchant Cash Advance?

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Great news! A merchant cash advance, or MCA, isn’t a loan. The lender gives you money in exchange for some of your daily sales, in addition to a small fee. Repaying the cash advance is easy because it comes directly out of your credit or debit card sales and goes straight to the lender. You don’t need collateral, even if your credit score is low. Merchant cash advances are quick, easy ways to get a little bit of cash flow in.

How Do Merchant Cash Advances Work?

You can typically apply for a merchant cash advance online. The process is fast and easy because it relies on your daily credit card sales to repay the advance. The lender will take a look at your sales volume to make sure you qualify. If you don’t do enough sales volume, you may be rejected because there’s no assurance that you’ll be able to pay it back.

In some cases, you may also be asked for credit scores and bank statements to ensure you’re reliable or trustworthy enough.  However, you can generally still qualify for a merchant cash advance even if your credit score is low. It’s best if you get most of your revenue from credit and debit card sales since that’s how you repay the advance. However, not all your sales have to come in this way to qualify.

You rarely have to enter the bank to get a merchant cash advance. You can apply online and may even be approved with cash in hand the same day from a private financing provider.

Just keep in mind that fast cash is usually more expensive because there’s more risk involved for the lender. It’s essential that you pay attention to interest rates and be careful when seeking out advances.

To apply for a merchant cash advance, you will need:

  • Driver’s license
  • Voided check
  • Credit card processing statements
  • Bank statements
  • Credit score
  • Business tax returns

Once you’re approved, the lender can connect to your credit card processor or bank account to transfer funds. In addition to a portion of your sales, the merchant cash advance provider will also charge a factor rate, which is similar to an interest rate. These range from 1.14 to 1.48, so you’re looking at a rate of 20 to 50 percent of what you advance. However, they can be much higher in some cases.

The rates are so high because the provider is taking on a lot of risks. They’re assuming your sales will continue to cover what you owe. They’re also assuming they can trust you not to take the money and run. These types of advances work for businesses with bad credit scores, less established companies, and other risky borrowers.

Merchant cash advance terms are very short. They generally take eight or nine months to repay. However, It can take as little as four or as long as eighteen months, depending on sales volume. If you pay a higher fixed percentage of your sales, it will take a shorter time to repay. However, this could cause a tight cash flow situation temporarily.

If lack of cash is the problem you’re trying to solve with a merchant cash advance, those terms could make it tough on your business to comply. Keep this in mind when deciding whether it’s right for you.

Who Qualifies for a Merchant Cash Advance?

Almost any business can qualify for a merchant cash advance. One of the reasons the factoring rates are often so high is because the risk for the provider is high. New businesses, businesses with lower credit scores, businesses who lack collateral, and other risky borrowers all have a chance to get a merchant cash advance.

The eligibility standards are pretty small. The only requirement is enough sales volume to repay the advance, which means these types of situations are great for restaurants and retail stores that have daily sales volume. A merchant cash advance can be a great short-term tool to help with inventory financing, unexpected expenses, payroll, debt payments, or working capital.

Is a Merchant Cash Advance Right for My Business?

So, how do you determine if a merchant cash advance is right for you and your business? One great thing about a merchant cash advance is that it’s unsecured. You don’t need collateral to qualify for the funds. A merchant cash advance is an excellent solution if you don’t have any collateral to offer. It also doesn’t put you at risk for losing that collateral later. If you don’t want to put your personal property up for your business, you won’t have to worry about it.

Merchant cash advances are fast. If you need money this week, chances are you can get it. Online applications are quick, and because the requirements aren’t rigorous, your chances of getting approved are high. And because the provider can link to your credit card sales or bank accounts, funds are almost immediate, and repayment is seamless.

Perhaps the greatest benefit of a merchant cash advance is that because they take a portion of your credit card sales to repay the funds, you’ll pay less during times of decreased business. With traditional loans, you pay the same monthly payment no matter what your income or revenue may be. A merchant cash advance goes easy on you when you don’t have as many sales. On the flip side, you can pay it back more quickly when sales are up.

Of course, you need to keep in mind that taking money out of your credit card sales can have more of an effect on your business than you anticipate. You need to understand your financials and how merchant cash advances work before you decide what to do.

Benefits of a Merchant Cash Advance

As we’ve already looked at, some of the benefits of a merchant cash advance include:

  • Access to funds quickly
  • Easy applications and approvals
  • Great for businesses with bad credit
  • Suitable for a variety of purposes like inventory purchases, unexpected expenses, and preparing for an uptick in business

Drawbacks of a Merchant Cash Advance

Despite the benefits of a merchant cash advance, there are still some drawbacks. The drawbacks include:

  • High fees
  • Less flexibility
  • Reduced cash flow while paying for it with credit card sales

Why You Need a Merchant Cash Advance

There are plenty of great reasons to get a merchant cash advance. The primary goal is for additional cash flow. If sales are down, you may not have enough money for all your business expenses. This is especially when you give your clients a thirty-day window to pay invoices. Your accounts payable could eat into the money you need to pay your own bills.

A merchant cash advance gives you temporary cash to make payroll and keep the lights on while you’re waiting on funds, such as outstanding payments to roll in or a new marketing campaign to start bringing more customers in the door.

You can also pay for unexpected expenses with a merchant cash advance. When you compare a merchant cash advance vs a business loan this is an excellent alternative because you get cash right away to fix the leak in the roof or repair damage caused by a storm.

Purchasing inventory with a merchant cash advance is very intuitive because you’ll be able to repay it with the money you make selling the new inventory. This is especially useful when you expect an influx of customers. Restaurants are an industry that benefits from this because they know they’ll need more ingredients for the dinner rush over the weekend.

Retail shops have seasonal costs that could benefit from a merchant cash advance as well. The holidays bring in a lot of traffic, so you can prepare for that with extra items on the shelves, more helping hands on the sales floor, and increased overhead for your extended hours.

Many businesses have high and low seasons in terms of sales. Even if you don’t struggle with the holidays, chances are you still have a few months when you experience a lull and need some extra cash flow to make it through.

Final Thoughts

The most important thing to know about what a merchant cash advance is is how to use it properly. You need to understand how it works and the impact it will have on your business before you move forward. However, if you need fast capital, relaxed eligibility requirements, or an easy way to repay with credit card sales, then a merchant cash advance might be the right choice for you.

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