By Derek Fall | April 22, 2022
A merchant cash advance allows a business owner who accepts credit card payments or have other payment receivables streams to obtain an advance of the funds regularly flowing through the business’s merchant account.
A merchant cash advance (MCA) is not a loan, but rather an advance based upon the future revenues. A small business can apply for an MCA and have an advance deposited into its account fairly quickly. Merchant cash advance providers evaluate risk and weight credit criteria differently than a traditional banker might.
An MCA provider looks at the daily receivables to determine if the business can pay back the advance in a timely manner. Basically, the small business is selling a portion of future credit sales to acquire capital immediately A merchant cash advance allows a business owner who accepts credit card payments or has other payment or receivables streams to obtain an advance of the funds regularly flowing through the business’ merchant account.
They’re quick and easy. When a small business owner needs cash in a hurry, a MCA is a great option. Instead of waiting weeks or months to receive approval on a bank loan, you can get an MCA in a few days. Lenders examine your business’s daily credit card receipts, evaluating them for cyclical patterns and trends, when deciding how much money to advance. Because they require less documentation to approve lending than a bank loan, they fund faster.
You choose how to use the funds. If you take out an equipment financing loan, you have to buy a piece of equipment with the funds. Other loans require that you maintain certain Balance Sheet ratios or restrict the funds’ use, which means that you’re inviting another party into how your business is run. With a MCA, issuers place few stipulations on how the cash is to be used. Many small business owners prefer this freedom.
Borrowers with poor credit can get funding. It can often be difficult for a small business owner with poor credit to access funding. But since lenders extend a merchant cash advance on the basis of credit card sales, a personal or business credit score is less important. MCAs are one of the most accessible forms of credit if you have a low credit score.
A MCA doesn’t hurt your credit score. Issuers don’t report payments and defaults to credit bureaus (though there are other consequences for defaulting on a MCA), so a MCA won’t hurt your credit score
MCAs have an easy qualifying process and the factor rate is calculated in a way that won’t disrupt the overall average cash flow of the business. We all know that it takes money to make money, and sometimes an MCA is completely necessary for small businesses looking to grow.
To grow a business, you need to hire more employees and purchase more equipment/inventory to reach your goals and reach the higher profits that are associated with an overall increase in business.
Say a business owner wants to launch a new product line that is in high market demand. They borrow $100,000 at a payback rate of $125,000. This may seem naive until you consider the fact that the capital that they borrowed can ultimately fuel long-term business growth.
Once the new product line is out, the company makes $450,000, with a healthy percentage in business growth and net profit as well. This means that the MCA funding company profits, the investors behind the funding companies profit, and the small business owner reaches a new level of business growth.
MCAs can be a responsible part of healthy and immediate business growth. Take it from Entrepreneur Magazine: “even short-term capital should be part of a long-term plan”.
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