Most businesses could use a little financial help from time to time, especially during the slower parts of the year when cash is not flowing as abundantly as other times. In cases like these, a loan can come in handy to cover various expenses. But there are other financial products that business owners have available to them, including a merchant cash advance.
What exactly is a merchant cash advance, and is it something you should take advantage of?
A merchant cash advance (MCA) is a way for business owners to access the capital they need to run their businesses, but it is different than a traditional business loan. If a significant portion of your sales is paid for via credit and debit, you can use your future receivables to get an advance of funds. Simply put, a merchant cash advance is an advance based on future credit card sales from your business. This can be a great short-term financing solution for your company, especially if a traditional small business loan doesn’t meet your needs.
With a merchant cash advance, an agreement will have to be made between you and the merchant cash advance provider in terms of the advance amount, the amount you have to repay, and the holdback percentage. When this contract is signed, the advanced funds will be deposited into your account in exchange for a future percentage of your business’ credit card receipts or receivables.
The agreed-upon percentage of your company’s daily revenues will be withheld by the merchant cash advance provider to repay them, which is known as the “holdback,” and will carry on until the entire advance amount is paid back in full. This holdback percentage is based on the amount of money your business gets, the amount of time it will take you to repay the advance amount, and the size of your monthly receivables.
For instance, if the agreed-upon holdback rate is 15%, that means 15% of your credit card transactions would be withheld by the merchant cash advance provider until the full amount is repaid.
Unlike a conventional loan, you pay back a merchant cash advance on your own time without necessarily having to adhere to a specific repayment schedule. There isn’t any rigid time period within which to repay the money in full. Instead, the lender will simply withhold a percentage of your daily sales until you’ve paid back your merchant advance.
The speed at which you can repay the advance amount is based on how much business your company does every day. The more transactions you carry out, the faster you can pay back the advance.
The opposite is also true, however: if your business makes fewer transactions, it can take longer to pay back the amount. Like most businesses, the number of daily transactions will change, so more can be paid back on some days, while on others, less will be paid back.
While requirements for a merchant cash advance approval will vary by lender, there are certain aspects of your business that most lenders will assess.
Find out why you were rejected for a business loan.
Just about any type of business that has customers who pay predominantly by credit card could take advantage of a merchant cash advance. As long as you meet the minimum requirements and you have predictable earnings, this type of financing arrangement may prove to be effective.
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A merchant cash advance can be beneficial depending on your business needs, but there are certain risks you should keep in mind.
If necessary, Check out these common business funding application mistakes and learn how to avoid them, click here.
You can use the funds received from a merchant cash advance in a number of different ways. Some common uses for merchant cash advances can include:
Merchant Cash Advance FAQs
Is collateral required for an MCA?
No, collateral is not required. Since the merchant cash advance is covered by your future cash flow, you don’t need any valuable assets to collateral the advanced funds.What’s the maximum amount that can be advanced?
Different merchant cash advance providers have different limits, though advances are typically made for anywhere between $5,000 to $50,000. What is the average holdback rate?
Again, this would vary from provider to provider, but the average range is between 8% to 30%. How long do I have to pay back the funds?
There is no fixed term. The repayment term depends on your card sales.
If cash flow is a problem for your business from time to time and you don’t want to go through the motions of applying for a traditional loan, a merchant cash advance might be a great option for you.
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