When speed is your number one priority, a merchant cash advance (MCA) could be a lifesaver. Many small business owners finance their business with merchant cash advances when time is short and money is shorter. payday loans PA Since MCAs aren’t technically loans, they don’t require the same strict eligibility standards that loans do-so you can score capital with low credit and zero collateral in no time.
What is a merchant cash advance?
A merchant cash advance empowers your business to trade tomorrow’s earnings for cash today. You receive a lump sum of cash upfront, and then you pay back the advance with a percentage of your daily sales. You’re essentially selling your future sales at a discount.
When time is money, it’s sometimes worth it to swap value for speed. You can use a merchant cash advance on pretty much any business expense: seasonal costs, business expansion, equipment repairs, cash flow gaps-you name it!
New businesses and those struggling with their credit score love MCAs for their lenient approval criteria and blistering-fast speed. You can receive cash advances for anywhere from $5k to $400k, making them versatile financing options.
Yes, it’s debt, but the structure of a merchant cash advance offers a bit of protection for your business: since your payments are dependent on your daily sales volume when sales slow down, your payments do, too.
How does a business cash advance work?
Traditional banks don’t usually offer merchant cash advances, so you’ll need to take your search online to find alternative lenders. Loan marketplaces, like Funding Circle’s, can expedite your financing process by finding the lender for you-you just submit a single application.
Submitting your application is quicker than taking a shower, and then you can sit back and wait for the offers to start rolling in. Once you receive an offer you like, it’s time to begin the financing process.
Once approved, you’ll receive a lump sum of cash in as little as 3 days. You’ll pay off the upfront capital with a portion of your daily credit card sales (plus interest)-and this repayment period usually begins immediately after you receive funds in your account. Payment period length can vary, but generally, they last between 90 days and 18 months.
Your merchant cash advance’s total costs are determined by the amount of the advance and your factor rate (which usually ranges between 1.1 and 1.5). Your factor rate is dependent on your business’s credit and financial strength-better credit means a lower factor rate. For example, if you received a $50,000 MCA with a 1.15 factor rate, you’d owe a total of $57,500.
Your holdback rate is the percentage of daily sales the lender will collect until you’ve repaid the MCA in full. This percentage is usually between 10% and 20%. Lenders will automatically take these “payments” out of your account each day. More sales mean higher payments and a faster payback period-fewer sales mean lower payments and a slower payback period.
Terms to understand:
Holdback rate: The percentage of your daily credit card sales that an MCA provider will take until you pay back what you borrowed (plus fees).
ACH MCAs: Like a normal MCA, except your lender withdraws a fixed daily or weekly amount from your business bank account-not a percentage of your sales.
Pros and cons of a merchant cash advance
Before you take on any new business financing, it’s important you understand the advantages and disadvantages. While merchant cash advances offer new and struggling businesses an incredible financial lifeline, they’re not flawless (like with any financing). Below, we’ll help you understand the pros and cons of an MCA so you’ll have realistic expectations.
