A merchant cash advance is a lump sum payment borrowed against a percentage of future receivable credit card and or debit card profits. Merchant cash advance companies provide funds to businesses. As soon as profits clear, the merchant cash advance company can take their percentage directly from the processor that settles and clears payments. So, why use a merchant cash advance? If you do not qualify for a bank loan or do not have the time to qualify, a merchant cash advance is an alternative solution. While it can be more expensive, they offer much more flexibility.
A merchant cash advance works as a contract between a merchant cash advance company and a merchant. Once the agreement is made, the merchant agrees to borrow a lump sum from the advance company in exchange for allocating a percentage of their future credit card sales to pay down the balance.
The first step requires the business owner to determine how much money they are going to need to cover the expenses that they want to cover with the MCA funds. Typically, this amount can be less than or equal to a business’s average monthly revenue, however, in some circumstances, it could be quite a bit more. It’s important to also research the laws in your state that govern merchant cash advance contracts. Some states may have specific restrictions on how much a business can borrow with an MCA and how much a lender can charge the business for providing the loan.
Once a business has a ballpark idea of how much they need and how much they can afford to borrow, they can begin to look for a lender who provides merchant cash advances. It’s important to review all the conditions and fine print that detail how much you will need to pay to the MCA provider. By comparing several different lenders and MCA providers, you can determine which one has the best terms and conditions for your needs.
When you find a lender or MCA provider that you would like to work with, they can then review all of your past credit card sales data to determine how much you can qualify for through a merchant cash advance. If you meet the minimum requirements, then the lender or MCA provider can offer you a contract containing all the details of the deal.
Here is a quick breakdown of all the details that you should review to understand what you are getting into before signing.
It’s important to review and understand all of the details above before signing a merchant cash advance agreement. Oftentimes, a business may end up paying 50% of the total principal amount in fees. This means that if you borrow $20,000, you may end up needing to pay back $40,000 by the end of the payment period. This may not be a wise decision for many businesses, however, if you expect a high return on your investment, then the benefits may outweigh the costs. Merchant cash advances may work as a solution in some cases but business owners should work toward qualifying for business loans in the future. One way to help your business qualify faster is to monitor your credit score and history. At mySMBscore, you can access insights as to how to improve the likelihood of qualifying for a business loan and find lenders that can help.
Although merchant cash advances may be easier to be approved for than conventional business and SBA loans, there are still a number of factors that lenders and MCA providers consider when determining eligibility. The main consideration that lenders and MCA providers will evaluate is whether or not you have a strong enough volume of daily credit card sales to make the payments on the amount you wish to borrow.
Even if you have less than ideal credit or if you have only been in business for a few months, if the volume is there, your chances of being approved can be significantly higher.
A merchant cash advance can be a good idea if you need money fast to fix a temporary cash flow problem, purchase needed inventory and supplies, or cover some unplanned expenses that are not feasible with your current budget. However, it may not be the best business financing option for some small businesses. Merchant cash advances can end up costing you more than other business financing options. That being said, sometimes the benefits of receiving that immediate cash outweigh the costs.
Merchant cash advances are similar to loans but they are not a loan. Therefore, merchant cash advances are not governed by the same laws that apply to other business loans.
The main difference between a merchant cash advance and other business loans is how the loan is repaid.
Repaying a merchant cash advance requires a certain percentage of your daily credit card sales to go to the lender whereas traditional business loans require monthly payments. Either way, you are going to need to pay interest to compensate the lender for the convenience of providing you with the upfront lump sum payment.
Merchant cash advance amounts vary by lender. However, the range for MCA amounts tends to range from $2,500 to $1,000,000 with a majority of those amounts falling somewhere between $5,000 and $500,000.
Merchant cash advances may not be the best type of financing for everyone. However, in some situations, the benefits may outweigh the costs. Here are some of the most common pros and cons of a merchant cash advance.
A merchant cash advance can be used for any type of business expense that you would like. However, more often than not, merchant cash advances are used in the following situations.
If you default on a merchant cash advance, you may be found in breach of contract and the lender or MCA provider can file a lawsuit against you. Also, if you signed a confession of judgment or a personal guarantee along with the MCA agreement, then you may not have any defenses against the seizing of business and personal property to pay back the amount owed.
Yes, some business owners can still qualify for a merchant cash advance with bad credit. The main reason being is that lenders and MCA providers look at the volume of your daily credit card sales as the main determining factor for eligibility.
If you feel a merchant cash advance is a good solution for your business, start by researching cash advance providers. Next, make sure you are working with an approved credit card processor so payments can be processed. When ready, submit your cash advance application. If approved, review the terms carefully so you know what to expect moving forward.
A merchant cash advance can put a short term Band-Aid on cash flow challenges but it’s not the most cost-effective solution. Businesses should work toward qualifying for a more cost-effective and beneficial business loan. A good place to start is at mySMBscore. The SMBscore was developed to create an industry specific, tailor-made risk assessment that can be used to determine the financial stability of small and medium-sized businesses (SMBs). It allows business owners to review their finances through a similar lens that a lender will. At mySMBscore you can view insights that lenders look at to approve your financing. Our platform can help you determine areas of improvement so that you can be as prepared as possible before applying for a loan. We can even help connect you to lenders that you have the best chance of qualifying for. Our goal is simple - to help businesses prosper.