If you are looking for a quick influx of capital for your business, MCA or a merchant cash advance can be a godsend. There is no denying that MCA offers many business owners a convenient option to raise capital quickly, but like most financial products, it is still considered to be fraught with risks.
How Does It Work?
This type of finance is not essentially a loan; instead it should be considered as a payment in advance against a company’s future income. The provider will give you a lump sum amount upfront, which is automatically repaid through a percentage of your business’s daily credit card receipts.
This percentage is known as the retrieval rate or as ‘holdback’ in some quarters. It can range from 5%-20% and is dependent on the size of the lump sum amount provided to you, daily credit card transactions of your business and the repayment time frame. Terms for repayment can in some instances be as short as ninety days or as long as eighteen months. It depends on the extent of the advance amount. Repayment for this begins as soon as your business receives the requisite funds.
The amount you are eligible to borrow is estimated on the basis of your business’s average credit card sales. The provider will assess your card receipts in the past three to six months in order to ascertain how big an initial amount your business is eligible to receive.
The lump sum amount you are provided with can vary from 50% to 250% of your firm’s average credit card sales.
What Are The Benefits Of Using A Merchant Cash Advance
There are several reasons why merchant cash advance is becoming an increasingly appealing option for entrepreneurs, some of which are mentioned below:
Straightforward Application Process
Like with many other small business loans available to entrepreneurs today, it is possible to apply for MCA online. Most lenders allow you to fill out the application online along with any/all supporting documents. Supporting documents can include:
- Business tax returns
- Bank account statements
- Credit card statements
Funding Is Quick
One of the biggest plus points for a MCA is the possibility of going through a quick approval and funding process.
Providers can come to a decision within hours and provide your business with the requisite funds within a few days. So, if you are in need of a quick capital influx, applying for a merchant cash advance can be ideal to meet your business’s current requirements.
You Do Not Need A Spotless Credit History
For most types of business funding available a spotless business and personal credit score is a mandatory pre-requisite. But, MCA providers on the other hand are comparatively more lenient than most other lenders, in terms of credit history. The chances of you being approved or not for a cash advance is more dependent on how long your business has been operational and the consistency of your credit card sales and not on your past payment history or how much debt you owe. However, it is important to keep in mind that securing a cash advance will in most likelihood not help you consolidate your credit score as most lenders fail to report them to major credit bureaus.
You Don’t Need Any Collateral
If you are approaching a bank (or any other major financial institution for that matter) for a small business loan, it is common knowledge to give some form of property or asset as collateral in order to secure the loan. This acts as an insurance policy or fail safe, ensuring that the bank can recoup the balance amount in the unfortunate event that you default on the loan. MCA’s on the other hand are technically considered unsecured loans, which mean that you won’t have to place any of your important assets on the block to secure the loan.
Typically small business loans come with fixed rates of interest, which implies that you have to basically pay a certain amount each month. Traditionally such an option can be more convenient from a budgeting standpoint. But, you could find yourself in a hole if your business suffers a slow month income wise.
Merchant cash advance on the other hand offers far more scope for flexibility considering that repayments are based on a fixed percentage of your business’s daily credit card sales. If the terms of the advance state that you have to dedicate 20% of your daily credit card sales towards repayment, the actual amount you repay on a daily basis will fluctuate based on how much revenue your business is bringing in. Simply put, how much you repay is completely dependent on how much revenue you bring in.
High Borrowing Limits
This type of borrowing will provide you with more leeway compared to other forms of funding in terms of how much of a lump sum amount you can borrow initially. You could potentially borrow even up to a few thousands of pounds, whereas some of the larger corporations have been known to borrow up to a limit of £2,000,000. Such amounts are considerably more generous than what even the most reputed of high street banks will be willing to offer especially if you don’t possess a spotless credit history or worthwhile collateral.
Why Some Business Owners Should Still Remain Wary
The benefits of using merchant cash advance versus any other type of loan are numerous, but still it has one very significant drawback that can easily outweigh all the other possible gains.
The reality is the overall costs involved in a merchant cash advance type of funding can easily override whatever you have gained in terms of accessibility or convenience.