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Intro To Merchant Cash Advances
If you’re a small business owner who needs quick access to capital right away, a Merchant Cash Advance (MCA) could be what you’re looking for. Also referred to as a Business Cash Advance, this type of cash advance a merchant can take is easily accessible and comes with flexible payment terms. Typical requirements like an excellent credit score or overflowing financial statements aren’t mandatory for merchant cash advance eligibility.
Payment amounts for a merchant cash advance are based on daily credit card sales and aren’t fixed, so small business owners only pay what their cash flow can bear each month. And though it’s geared towards short-term initiatives, a merchant cash advance doesn’t become more expensive if sales slow down for a little while. This makes a merchant cash advance ideal for small businesses that would struggle with the fixed payment schedule of traditional business loans.
In this guide, we’ll answer the following questions about a merchant cash advance and more:
What Is a Merchant Cash Advance?
A Merchant Cash Advance (MCA) is sometimes referred to as a “Business Cash Advance,” “Credit Card Factoring,” or a “Credit Card Processing Loan.” A business owner will receive a lump sum paid back via a fixed percentage of future daily credit card sales (Holdback Rate). Payments are automatically deducted each day, and the size of each one fluctuates with your debit and credit card sales volume.
A merchant cash advance is not as challenging to qualify for as other small business loan options. Small business owners with little collateral, business credit history, or low fico credit scores may benefit from this option. The amount of business financing you qualify for from merchant cash advance companies depends on the amount of future credit card receivables or the sales you make to customers using a credit card payment.
With this kind of business financing arrangement, you agree to receive a lump sum payment of capital in exchange for your future credit card sales at a discount. The capital is distributed almost immediately from the merchant cash advance provider instead of waiting weeks/months to get the full amount from the credit card processing company. This is known as an “advance” on your future credit card sales.
How Does a Merchant Cash Advance Work?
So here’s how a merchant cash advance works as opposed to traditional bank loans. The size of your borrowing amount and your merchant cash advance terms depend primarily on your previous and anticipated monthly credit card sales volume. This is the main criterion for merchant cash advance qualifying in general. As long as you have strong debit and credit card sales, poor credit probably won’t prevent you from qualifying.
However, your business credit profile does impact several other elements of your merchant cash advance loan. This includes the fixed percentage of daily or weekly sales that gets deducted, which is called your “holdback rate.” Typical holdback rates run between 8% and 15% of daily sales.
Each borrower is assigned a Factor Rate instead of an interest rate like you have with traditional bank loans. This determines the total amount you’re going to repay to the merchant cash advance provider. A common factor rate typically ranges from 1.09 to 1.5.
Example of a Merchant Cash Advance:
For example, let’s say you borrow $50,000 with a factor rate of 1.4. This means you’d owe $70,000 in total. MCA providers deduct 10% of your debit and credit card transactions each time you batch out. In the first month, you generate $100,000 in card transactions. Based on your percentage, you’d pay $333 per day to pay back $10,000 for the month. In the second month, your sales drop to $70,000. Since the holdback percentage never changes, your daily payment would drop to $233.
Like other short-term business financing products, a merchant account loan is designed to be paid in full as soon as possible. However, the total cost decreases when your outflows are more spread out due to slow sales.
Merchant Cash Advance – Research, Facts & Reports
Almost 64% of small businesses in America still deal with financing challenges, including managing operating expenses, access to capital, and issues making debt payments. Source: Small Business Credit Survey: 2019 Report on Employer Firms
Online lending continues to grow. Morgan Stanley forecasts that by the end of 2020, online lenders/fintech companies will lend small businesses $47 billion. That’s 16% of the total small and midsize business credit approvals. Source: National Community Reinvestment Coalition
Debit and credit card transactions increased 8.9% each year between 2015 and 2018, and ACH (Automated Clearing House) payments grew by 6% annually from 2015 through 2018. Source: 2019 Federal Reserve Payments Study: Initial Data Release
What Are The Advantages of Merchant Cash Advances?
Few products are easier to qualify for. If you have subpar credit, cash flow problems, and less than one year in business, this may be the only way to get the funding you need. And since the requirements are so loose, you can get approved in under 24 hours.
The repayment structure is particularly advantageous for highly seasonal businesses or businesses that experience occasional revenue dips. Slow months mean smaller payment amounts than paying the same amount each month, regardless of how well your business is doing. Seasonal businesses could theoretically use the funds during the slow season and pay off a good chunk of the loan during the busy season, even if the two periods are three or four months apart. When sales start to drop again after the busy season, you don’t have to worry about making the same payment as before.
This scenario is ideal for a merchant cash advance because the amount you pay would fluctuate and be more spread out.
For example, let’s say you advance a merchant cash loan of $100,000 with a factor rate of 1.3. This puts your principal at $130,000. If you paid off the entire advance in six months, your APR would be at least 60%. If you repay the advance agreed upon in twelve months, your APR would likely be closer to 30%.
What Are The Disadvantages of Merchant Cash Advances?
Loose requirements come with a cost. Borrowers with subpar fico scores and cash flow problems are statistically less likely to pay off the merchant cash advance on time. For this reason, a merchant loan is one of the most expensive small business financing products on the market. Larger payment amounts offset the heightened degree of risk placed upon the merchant cash advance company.
The size and frequency of your payment amounts could also put tremendous pressure on your operating capital. You’d make much higher payment amounts even if your sales remained strong for several months.
Lastly, there’s no benefit to paying off the entire advance early. Unlike a more traditional financing option, your repayment amount would be the same, regardless of when you pay off the advance. This differs from a business line of credit or term loans with amortization schedules, where paying early allows you to save on your interest rate percentage.
- Get access to capital quickly
- The approval process is easy
- Less than perfect credit accepted
- Use for a variety of purposes
- Higher rates & fees than with traditional loans
- May have to change merchant services provider
- A shorter repayment term may reduce working cash flow
Merchant Account Loans Compared To Other Products
|Loan types||Max Amounts||Rates||Speed|
|Merchant Cash Advance||$5k – $1m||Starting at 1.09||1-2 business days|
|SBA Loan||$50k-$10m||Starting at 3.75%||3-5 weeks|
|Business Term Loan||$10k to $5m||Starting at 5%||1-3 business days|
|Business Line of Credit||$1k to $450k||Starting at 1% p/mo||1-3 business days|
|Receivables/Invoice Factoring||$10k-$10m||Starting at 1% p/mo||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 3.5%||3-10 business days|
|Revenue Based Business Loans||$10K – $5m||Starting at 1% p/mo||1-3 business days|
Who Qualifies For Merchant Cash Advances?
Approved businesses generally met the following criteria:
How To Apply For a Merchant Cash Advance:
You can borrow up to $1 million, with terms of up to 18 months. Here’s how to apply:
Step 1: Consider Your Needs
Before you begin the application process, take some time to make sure this is the right product for your needs and circumstances. Will you be able to use the capital for your desired purpose? Will the repayment structure do more good than harm to your operating capital? Do you know exactly how much funding to request? Answering these questions ahead of time will make the rest of this process much easier.
Step 2: Gather Your Documents
The application requires the following documents and information:
- Driver’s license
- Voided business check
- Business bank statements from the past three months
- Credit card processing statements from the past three months
Step 3: Fill Out Application
You can begin the application process by calling us or filling out our one-page online application. At this stage, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This will ensure that there are no surprises or hidden fees during repayment.
Step 5: Receive Approval
The process generally takes a few business days, and once you’ve been approved, the cash should appear in your checking account in 1-2 business days.
Your Merchant Cash Advance Gets Set Up – Now What?
A small business loan isn’t just a way to get financing. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the small business loan product you get, make all of your required payments on time and in full. If you get a business line of credit or another revolving product, keep your balance below the limit. If you took an accounts receivable financing product, your hope is that your customers pay their invoices on time so that the financing company can collect on them.
Consistently making your business financing payments on time and in full will positively impact your fico scores. And that means preferred rates and terms when you next need a small business loan.
What If I’m Declined For a Merchant Cash Advance?
If your merchant cash advance application gets declined, it might be because your operating capital cannot withstand the daily repayment structure. In this case, we recommend another product that puts less pressure on your operating capital and is easier to repay. Other options can include accounts receivable factoring, equipment loans, or other working capital loans.
If a business owner cannot afford to take on more debt at this time, we might also recommend a different financing tool. Possible examples include business credit cards or personal loans. Either option can help you build credit and will likely be easier to qualify for than small business loans.
If you were declined for poor fico scores, you should consider these credit repair services to help with your personal credit and the appropriate business credit bureaus. They can help you boost your credit scores with personal and business credit bureaus by identifying the issues keeping your score down and creating a plan for eliminating them.
People Also Ask:
What Is The Holdback Rate?
A Merchant Cash Advance is repaid to the MCA provider by taking a cut of your daily future credit card sales. This cut is called the holdback rate, and typical holdback rates range from 5 to 12%. So let’s use retail businesses as an example. Your retail shop does $5000 in daily credit card sales, and you agreed to an 8% retrieval rate. The mca provider automatically gets repaid $400. You get the other $4600 straight into your checking account.
Because the fund transfer happens automatically between your credit card processor and merchant cash advance providers, you never have to worry about late fees on your merchant cash advance. Since repayment doesn’t depend on your ability to pay on time, there’s nothing to report to a credit agency.
Can a Small Business Owner Get a Merchant Cash Advance With Bad Credit?
Yes, this product is available to small business owners with bad credit. Remember, your borrowing amount is based almost entirely on your daily or weekly debit and credit card sales. And since the repayment structure of a merchant cash advance is expensive by nature, borrowers are basically expected to have bad fico scores. However, your fico scores will impact the product’s cost and terms. Thus, consider our credit repair services before applying if you’re looking to access the lowest possible rates.
Merchant cash advance providers will usually want to see at least your last three to six months of credit card volume. They want to see how much your business typically processes in card sales. This information helps the funder determine how much cash they’ll advance you and under what terms.
Are Merchant Cash Advances For Failing Businesses?
This is a huge misconception that originates from the loose requirements of a merchant cash advance. But the truth is, bad credit does not mean your business is failing. Many small business owners have trouble because they had no choice but to use personal credit cards to keep their business alive when they hit an early speed bump.
Also, bad credit is far from the only reason to seek a business cash advance. Since this product is not categorized as a “loan,” it does not show up as “debt” or a “liability” on your balance sheet. If you already have too many liabilities, adding another could hurt your business credit scores and make it difficult to obtain trade credit from vendors.
How Much Can I Borrow With a Merchant Cash Advance?
In most cases, a merchant cash advance will allow you to receive anywhere from 50% to as much as 150% of your average debit and credit card sales. This average is based on the past three months’ worth of data. However, more significant amounts can take slightly longer to appear in your business checking account.