Merchant Cash Advance

Merchant cash advances are unique types of loans that provide funding for small businesses based on potential credit and debit sales.

A merchant cash advance, also sometimes referred to as a business cash advance, offers business owners cash with the expectation that funds will be repaid in the future. Merchant cash advances are based on previous credit card and debit card sales rather than the standard criteria for most loan options.

Continue reading to learn more about the ins and outs of merchant cash advances.

More Details on How a Merchant Cash Advance (MCA) Works

Because merchant cash advances offer business funding, many people consider them business loans; however, the way these loans work is significantly different from the business loan process.

With a standard business loan or line of credit, the lender will look at the business’s credit scores (with the appropriate business credit bureaus) and revenue/cash flow. A guarantor may also be involved with that process.

With a merchant cash advance, as mentioned above, lenders will pay attention to past debit or credit card sales to figure out how much a business owner can repay. And so, if your business doesn’t accept credit card or debit transactions, then you will not be able to take out a merchant cash advance—however, businesses that only accept cash are pretty rare nowadays.

Because merchant cash advances look at sales, business owners may find more flexibility with merchant loan options than traditional business loans which can be difficult to qualify for funding without an established business credit history.

Once approved for a merchant cash advance, a business owner will receive the funds in a lump sum payment, which they can use accordingly. Repayment is simple but unique. Sometimes instead of a steady monthly payment like an installment loan or a payment based on usage, with a merchant cash advance, the lender will pull directly from a business bank account that the borrower gives them access to. They will pull either daily or sometimes weekly based on how much money the business has made on their sales/ the amount of cash flow. This is another way that merchant cash advances can offer more flexibility than traditional business loans.

How Much Can I Expect To Get From a Merchant Cash Advance?

Merchant cash advances can range anywhere from a few thousand dollars to millions. Most merchant cash advances for small business owners will range between a few thousand to a few hundred thousand dollars. The amount your business may get through a merchant cash advance will depend mainly on the lender, your industry, and debit and credit card sales.

Where To Find Merchant Cash Advance Companies?

Merchant cash advances can be found mostly online, but there may be some financial institutions like banks, credit unions, and in-person lenders that offer these kinds of loans. When it comes to applying for a merchant cash advance, the process is pretty simple. You’ll have to find a merchant cash advance company you want to work with and then begin the application process.

For merchant cash advance approval, you’ll have to provide proof of past sales from debit and credit card transactions. With that information, the lender can gauge future credit card sales and debit transactions to determine how much money they feel safe giving out. The approval process with a merchant cash advance provider is usually faster than a traditional loan that requires a credit check and verification of several different types of information.

Best Uses for a Merchant Cash Advance

Like a business loan, a merchant cash advance can be used for all business-related expenses. Here are some of the best uses for these loans to help your business:

  1. For working capital.
  2. If your business needs a quick influx of cash.
  3. Opportunistic purchases for bulk buying.
  4. Financial emergencies.

And so, as you can see, the best uses for merchant cash advances are for short-term uses rather than substantial expenses like a significant growth period.

The Cost of Merchant Cash Advances

Because merchant cash advances aren’t a traditional loan option, they don’t come with interest rates. Instead, merchant cash advance lenders will charge a factor rate. A factor rate is expressed as a decimal and will range between 1.1 to 1.5. A factor rate is only charged to the original amount borrowed. One way that factor rate is determined is similar to interest; the higher the lender feels there is a risk of missing payment, the higher the factor rate. Having bad credit with your business will usually mean a higher factor rate. There are a few other variables that will impact a loan’s factor rate, including the type of industry the business operates in, debit and credit card transactions, years in business, cash flow, sometimes personal credit score, and other business financials.

Advantages and Disadvantages of Merchant Cash Advances

There are definitely some pros and cons to merchant cash advances. As a small business owner, it is extremely important to know some of those ins and outs before deciding on whether this option is right for your business.

A Merchant Cash Advance Can Provide Flexibility

With most traditional small business loans, owners will have to make monthly payments that stay the same throughout the loan. Although this can be convenient for individual borrowers with a steady income, income can fluctuate with businesses. And so, having your payments based on weekly or monthly cash flow can provide flexibility when income is inconsistent.

Businesses Don’t Need an Excellent Credit Profile

With other business loan options, a business credit profile or sometimes personal credit will be a huge factor in determining eligibility and approval. However, with merchant cash advances, as you now know, that is not the case. Future sales are more important!

The Funds Can Be Used for Almost Any Expense

The funds from a merchant cash advance can be used by a business for almost any business-related expense.

The Funds From a Merchant Cash Advance May Not Be Enough Money for Every Business.

Although flexible, Merchant cash advances may not provide enough funds for all the different expenses a business may have. Instead, these loans work better for a single expense that isn’t that large.

Merchant Cash Advance Rates May Be Higher Than Other Business Funding Options.

Because merchant cash advance lenders lend money to businesses that may not have the best credit rating, they are taking a risk. And because of that, their costs are usually higher than a traditional small business loan.

These Loans Are Not Reported to Business Credit Bureaus and So Does Not Help Build Credit

If you are a business owner looking into a merchant cash advance because you want to help establish or rebuild your business credit, you should know that merchant cash advances do not help with that. And that is because merchant cash advance lenders do not report to the business or personal credit bureaus.

It May Be Detrimental to a Business’ Revenue for Daily or Weekly Withdrawals.

Unlike a loan, where you make steady payments, with a merchant cash advance, a lender can withdraw funds daily or monthly. And although this may be convenient when making small amounts of money available, it can also be detrimental when a business makes a lot of money. And it may also lead to a cycle of playing catch-up with income and advance payments.

Alternatives to a Merchant Cash Advance for Business Financing

Merchant cash advances definitely have their place when businesses need some extra funding. However, they may not be the right fit for everyone’s business plan. The good news is that there are definitely alternatives that business owners can consider; here are some small business financing options to look into:

Small Business Loans

Small business loans offer funds that can vary in amount, that businesses can use for almost business-related expenses. These loans can be found with lenders like banks or credit unions, but borrowers can also look to the federal government through the Small Business Administration or SBA. The SBA is a great place to start for many small business owners, so definitely check them out for resources beyond government-backed funding.

Traditional Bank Loans

Traditional bank loans, such as personal and installment loans, are another avenue that business owners can look into if they own the business themselves.

Business Credit Cards

Business credit cards are a form of revolving credit that offer business owners a line of credit. In most cases, the business’s credit scores and revenue will be looked at, but in some cases, personal credit may be looked at for approval.

Merchant Cash Advance Providers Banned from Industry, Ordered to Redress Small Businesses | Federal Trade Commission

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