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When a Merchant Cash Advance is the Best Financing Option for Your Business

When is an MCA the Best Financing Option for My Business?

Yes, sometimes an MCA can give you the perfect financial boost you need. A Merchant Cash Advance is a form of financing that moneylenders collateralized using a company’s yet to come sales. The product offers upfront funding in trade for a cut of the business’s total credit & debit card transactions or per-day bank payments until you fully pay out the advance.

Unlike bank loans that feature interest rates and fixed per-month payments, MCA costs vary depending on a factor rate instead of an interest rate. Factor rates begin from 1.1 to 1.5, and its product (when multiplied by the amount you borrow) gives the payback amount.

The lender takes their daily cut straight out of the bank account that temporarily holds the cash and card transaction deposits. Settlement windows also vary significantly—  most times it ranges from as little as three months to 18 months.

MCA is for the most part important to microbusiness that has bad credit and no collateral or guarantees except cash flow to depend. But like other financing options, MCAs have their risks. The two most common ones are the cost of the advance and the short contract term.

Payback window

A 6 to 12-month payback window means a considerable share of your card sales or per day revenue will be used to goes into repaying the advance. With MCAs, the percentage you pay changes based on your agreement terms; nevertheless, anticipate spending not less than 10% to 12% of your card sales or per-day revenue on the settlement.

Cost of an MCA

An advance is considerably costlier than a typical bank loan. So whether you get a merchant cash advance over a more conventional loan option should depend on the urgency of the financial needs. MCAs offer speedy business funding, and easy settlement provided a business has sufficient cash flow to pay back the advance.

Uncollateralized funding

MCAs don’t beg for personal guarantees. The MCA is recorded strictly under the business’s name meaning it is not attached in any way to your personal credit and you are not held accountable for any settlements—your company is. But there are exceptions when you need to offer collateral.

Paperwork for an MCA application

To ensure your submission earns you an advance, your paperwork must include the following

  • Two years of Personal as well as Business tax returns
  • 6-12 months of Profit & loss reports
  • 6 months of your Business’s bank account statements
  • 6 months of your Merchant processing statements

In a nutshell,

MCAs can prove to be the most valuable option in cases where you don’t have collateral and time but can count on your cash flow. So next time you’re pressed for finances, scrutinize MCAs to check whether they can work for you. Make sure you research and prepare for possible drawbacks like the full cost and repayment terms of the advance.