If you have good credit card sales but your business hasn’t established itself long enough to qualify for a traditional loan or you need cash and you don’t have great credit, consider a merchant cash advance . A merchant cash advance (MCA) is a quick way for small businesses to get the capital they need. If you are looking for a convenient way to grow your business or temporarily sustain cash flow, get a merchant cash advance.
How a Merchant Cash Advance Works
A MCA is an advanced payment against the future credit cards sales of your business. It is not a loan. If you are approved for an advance, the lender will give you a lump sum based on your average credit card transactions. The amount you were advanced and the fees are automatically withdrawn using a percentage of your daily credit card sales. Depending on the amount of the advance, your credit card sales, and your repayment schedule, you can expect your percentage, better known as a retrieval rate, of between 5% and 20% or higher. Typically, repayment schedules run between three and 18 months. As soon as you receive an advance, the repayments begin.
A lender determines the amount of your advance by reviewing three to six months of your most recent credit card sales. Depending on the lender, you can expect an advance of between 50% and 250% of your credit card sales.
The Advantages of a Merchant Cash Advance
For a small business, a merchant cash advance is appealing for a number of reasons, such as:
- Poor Credit Isn’t an Issue: It is very difficult to get a traditional loan if you haven’t built up enough credit or your credit is bad. Approval is not based on how much debt you’re carrying, but on the strength of your credit card sales and how long your business has been operational.
- A Simple, Online Application Process: Get a merchant account advance by applying online and upload any supporting documents, such as credit card processing statement from the last three to six months and bank account statements.
- Get Money Fast: With a few hours, you will know if you have been approved for an advance. Then, you receive your money within a couple days. This is especially important if you need to pay for unexpected expense, such as equipment replacement.
- Collateral is Unnecessary: Since a merchant cash advance is an unsecured type of funding, you don’t need to put up collateral to secure the loan. Collateral, such as personal or business assets, is put up with other types of loans to ensure financial institutions still get what they are owed even when you default on payments.
- If Sales are Low, Your Repayment Is Smaller: Traditional loans require borrowers to pay a fixed amount each month. Since a merchant cash advance is based on a flat percentage of your credit card transactions, the actual amount you pay depends on the total of sales for that particular month. Therefore, if you bring a lot of sales one month, expect to pay back more.
The Minuses of a Merchant Cash Advance
One of the more confusing and misunderstood aspects of a merchant cash advance is how the factor rate influences what you pay to a lender. Instead of an annual percentage rate, which is assigned to term loans, businesses pay a factor rate. A factor rate, which ranges between 1.1 and 1.5, is what you multiply your loan amount by to figure out the total amount you will owe. When a factor rate is converted to an annual percentage rate, which is used calculate loan repayments, you are looking at interest rates starting at 15% with the possibility of them climbing much higher. Also, the average repayment schedule for a merchant cash advance is about nine months. Therefore, the greater the fixed percentage of your credit cards you agreed to pay, the shorter your repayment period. This type of arrangement will reduce your cash flow. A way to loosen the impact on your cash flow would be to pay a smaller fixed percentage of your daily sales, so that the repayments would stretch out over a longer period of time.
Another negative aspect to a merchant cash advance is that it is not tax-deductible like other funding options.
Other disadvantages are that if you don’t like the merchant account provider you signed up with it is difficult to switch to another. Finally, you can expect to higher fees than you would with a more traditional loan because the terms are much shorter and the rates are higher.
If you need a short-term financing tool to help clear up debt, cover an unexpected expense, or just get you through a rough patch, then think about applying for a merchant cash advance. The process is simple, approvals are quick, and you don’t need to have any assets to put up as collateral.
If you are a small business that needs money fast, then get a merchant cash advance by applying to First American Merchant. Get a merchant cash advance by using its streamlined process. It offers funding solutions that cater to each business’ needs. Apply online and get the money you need when you need it.