One of the most common reasons that businesses fail is the lack of cash flow. In fact, a survey conducted by U.S. banks has discovered that as much as 82% of small businesses fail due to cash flow problems.
Cash flow problems occur when your monthly expenses surpass the amount of cash you have on hand. This could be attributed to slower sales or customers defaulting on their payments. Poor cash flow can put a serious halt to your business as you won’t be able to run your daily operations or even invest in the growth of your business.
If you have a business that is currently struggling with cash flow problems, you may have contemplated seeking small business funding. It may be worth the time to look into getting a merchant cash advance. Let’s explore this topic further.
What Is A Merchant Cash Advance?
Unlike a traditional bank loan, a merchant cash advance (MCA) comes from a lender who will look at your credit card receipts and assess how much you need and how much you can pay them back.
When you sign the contract with the MCA lender, the form will lay out the amount you are getting plus how much interest you will need to pay back. Interest amounts will vary, depending on the company.
The state in which your business is based also determines how much you will have to pay, and the amount of interest you will be required to pay back. There are certain states that place limits on interest rates.
How Do They Work?
It is relatively quick to apply and receive a merchant cash advance. The final amount approved will be based on the volume of the daily credit card transactions.
A business can receive funding of as little as a few thousand dollars up to well over $200,000. Accessibility to these funds can be in as little as a few days. Repayment terms are relatively short, less than 18 months.
The cost of the loan depends on the money you are awarded as well as your factor rate, which can be from 1.1 to 1.5. Your factor rate is determined by the financial strength of your company. The better the credit score, the lower the factor rate.
For instance, if you were to receive an MCA of $100,000 and your factor rate is 1.2, you will owe a total of $120,000.
The lender will get a percentage of your daily credit card transactions till the funds are completely paid. This percentage is known as the “holdback rate”, which can range between 10% to 20%.
Most of the time, lenders deduct these funds automatically from your account. The repayment terms are based on a percentage of your daily sales. This way, you don’t need to worry if sales were to suddenly decelerate.
Is A Merchant Cash Advance Right For Your Business?
Merchant cash advances are a good option if you are a business that needs access to cash now but does not qualify for a loan from the bank. However, even if you did qualify for a bank loan, the process is a lot lengthier and with more paperwork required. MCAs are processed a lot faster and don’t require too much in terms of paperwork.
If you are a business that needs access to capital fast to take care of short-term expenses, MCAs are a good option. In addition, if you have cash flow issues that you know are just temporary or you need to pay for a one-time business expense, MCA’s could definitely help.