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Merchant Cash Advances Explained

SME financing is an excellent way to deal with unanticipated business expenses or fund a project that will expand your bottom line. But funding alternatives are different in features, terms, and costs, and some options may suit your requirements better than others.

An MCA, for instance, is a form of financing built to offer funding to a micro-business. Merchant cash advances are, in most cases, easy to win than conventional business loans, but they work differently than the latter.

They are not even controlled by the same rules that regulate business loans. Even worse, there exist no rules governing the issuing of these finances, which could lead to exorbitant rates and an endless cycle of debt.

Understanding the ins and outs of MCAs can ensure you use this form of financing safely.

Merchant Cash Advance: Understanding its Fine Points

An MCA is when a funding company issues an advance amount in trade for a business’s forthcoming credit card sales. In essence, you borrow finances to pay back with your yet-to-come revenue.

The amount a business can borrow fluctuates with a lender’s terms with others offering companies up to 250% of their credit card revenue, and others a predetermined loan amount range. A business pays back its MCA as a percentage of their day-to-day card sales.

Merchants can allow an advance provider to remit anything from 8 to 30 percent of their daily card revenue. The funding company decides the percentage, and the pre-discussed portion is cut off automatically from their business’ banking account.

The Cost of an MCA

A factor rate determines an MCA’s cost, instead of an APR (annual percentage rate) as with most types of loans.

This factor rate could be anything between 1.1 and 1.5, but some finance providers have higher or lower rates. Multiplying the factor rate with the advanced amount gives you the payback amount.

Settlement terms vary by lender, but most fall between 8 and 18 months; they have a shorter settlement window than loans.

Why go for an MCA?

An MCA typically offers the following advantages;

  • They offer microbusinesses quick and easy financing instantly.
  • Hassle-free application
  • No credit score checks
  • Acceptance in 24 hours.
  • Acceptance rates are high.
  • Finances are available 24 to 48 hours.
  • They do not require collateral.

But retailers must be warned of the downsides of this alternative method of financing. MCA’s are typically more expensive than a bank loan.

Why an MCA could be Expensive

We know that MCAs use factor rates, but working out the actual APR for the full payback period is what gives you its real cost. It provides a clear picture of the compound interest and fees.

In essence, more per-month card sales and faster-than-anticipated payback can lead to a higher annual percentage rate, which means there are no benefits if you settle the advance amount faster.

In the worst cases, these APRs go as high as triple-digit figures, which explains why you should always work out the real APR of any MCA offer before settling for it.

Wrapping Up

MCA’s are easier to get than other loans. Typically, any cash advance company that trusts in a business’s potential to pay back will accept it.