What Is a Merchant Cash Advance and Can It Help Your Business?

3 min

Are you a business owner who needs cash? You may not have the best credit to qualify for business loans.

Instead, consider a merchant cash advance.

An MCA loan provides immediate cash payments to business owners who need cash. You’ll pay the money back through daily or weekly credit card sales. The lender takes a small percentage of each credit transaction, and you don’t have to contend with a monthly payment.

This article will reveal why a merchant cash advance may be the right option for you. Let’s explore.

How MCAs Work

Overall, the lender will give you a lump sum advance for your future credit card sales. As the borrower, you’re offering a percentage of your future income.

The payment plan can come in two different forms:

  • The Percentage Method: Lenders will deduct a percentage of all credit card transactions until you pay the loan in full. In most cases, you have between 3 to 12 months to pay back the loan. Under this method, the payments largely depend on your credit sales.
  • Daily/Weekly Method: Lenders will establish a daily or weekly schedule to deduct the payments. If lenders deduct 10% based on a $100,000 loan, for instance, you would pay $333 a day, or $2,331 each week. This method doesn’t change depending on your credit sales.

The structure of the loan will depend on the lender’s guidelines, but you can negotiate the best structure for you. The percentage option is a better choice if you contend with fluctuating credit card sales. On the other hand, choose the daily/weekly alternative if you prefer stable payments, and if you have a stable business income.

The Benefits of an MCA

Overall, you can receive MCA loans faster than other loans. Many lenders will send the funds to your account in less than a week. Moreover, you can be approved in as little as 24 hours.

It’s also a great option if your business has suffered a dip in income. The payment amount largely depends on how much you make. You’ll make smaller payments when you have less income.

However, you must still make the payment within the allotted timeframe of the loan. Nevertheless, the fixed percentage system adjusts your current income level.

Since MCAs are tied to your income alone, you don’t have to worry about collateral. With collateral business loans, you must pledge valuable assets (i.e. your house, car, or stocks) to qualify. If you default on a standard business loan, lenders can seize your assets.

  • Note: The MCA lender may still ask you to sign a statement stating you’ll pay back the loan. If you default, the lender can use whatever means within the law to recover the remaining funds.

MCA Rates

MCAs offer interest rates in the form of a factor rate. A factor rate comes in a decimal form. A typical factor rate for an MCA loan is between 1.2 to 1.5. You’ll get a higher rate if you have the following red flags:

  • Your credit is low
  • You don’t have a stable business income
  • Your credit card sales are sporadic

A high factor rate means the lender will get most of their money back if you default on merchant cash advance. A high factor rate also means higher fees for borrowers. To assess the factor rate, multiply the decimal form by the lending balance.

  • Example: If you borrow $50,000 on a 1.4-factor rate, you multiply 1.4 by $50,000. Therefore, you’ll owe $70,000.

Merchant Cash Advance Qualifications

The qualifications usually depend on the lender’s discretion. In most cases, however, MCA lenders are more flexible than conventional business lenders. In terms of credit scores, you may get an MCA loan with a score in the 500s.

For many conventional loans, you must have a score of at least 620s. Some institutions require a credit score in the 680s or higher.

Even though credit is the primary factor in the application process, lenders will still include your credit score when reviewing your application. Overall, lenders use the following factors when assessing an application:

  • Credit profile
  • Annual business revenue
  • How long you’ve been in business

When dealing with MCA loans, lenders are more interested in your income than your credit profile. If you have a good income, chances are high that you’ll qualify. Good income also depends on the lender’s rules and guidelines.

  • Example: In most cases, you must make at least $10,000 in business revenue.

The length of time you must be in business is also subjective, but many lenders prefer borrowers with minimum six-month business history.

MCA Cons

The primary drawback is that you must pay the loan within a short timespan. Most MCA loans last up to a year. If you have a high factor rate, you’ll pay a higher balance overall. Additionally, you could pay an APR as high as 300% in some cases.

In addition to short-term payments, MCAs are only temporary solutions. MCAs won’t fix long-term financial issues.

Further, the deduction of your credit sales may hamper your company’s ability to grow in the future. This is especially true if you’re dealing with cash flow issues. A reduction in credit sales will add to your cash flow burdens.

Is a Merchant Cash Advance Right for Me?

A merchant cash advance is a right option if you need short-term cash upfront. MCA lending standards are usually more lenient than standard business loans.

You don’t need the best credit or income to qualify. The biggest draw is that you can have a small payment deducted from your account to pay back the loan. With that, a factor rate can cause you to pay more than you can afford.

Interested in reading more? Read more on our blog to gain insight into other topics.

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