Preparing For Merchant Cash Advance Application

Business Expansion

Jacques Famy Jr
Review By Todd Millman

Applying for a merchant cash advance is relatively easy. But, before applying, it’s crucial to understand the application process, the cost of a cash advance, and what could stop you from qualifying.

Without knowing the application process in depth, you might apply and get rejected, leading to cash flow issues and an inability to invest in business growth.

You'll want to learn how to apply for an MCA to ensure you can access the funding you need when you need it. 

This article outlines all the steps you should take when applying for an MCA. It also dives into the reasons why your application could be rejected and what you can do to increase your chances of qualifying.

If you’re ready to apply for a merchant cash advance, click here to start your application now!

What Is a Merchant Cash Advance?

Small business owners might call a merchant cash advance (MCA) a small business loan. But it’s a little different than your typical loan. An MCA is a business financing instrument based on your future credit card sales volume. 

How Does a Merchant Cash Advance Work?

  • Merchant cash advance providers give a business owner a lump sum. 
  • Owners repay this with a percentage of their card sales. 
  • Depending on the repayment terms, you might pay back this percentage daily, weekly, or monthly. 
  • Repayment terms depend on the factor rate, similar to an interest rate.
Business & Work, What Is a Merchant Cash Advance?

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An MCA or business cash advance is an excellent funding option for companies that rely on credit card sales and need quick funding for business growth or cash emergencies. Since processing is relatively quick — sometimes on the same day — small business owners can use MCAs to meet pressing cash flow needs.

This type of business funding relies on credit card sales, so applying for a merchant cash advance depends on whether your small business accepts credit cards as customer payment. If you only accept cash, you might consider other business financing options, such as business loans or invoice factoring.

Why Apply for a Merchant Cash Advance?

There are several reasons why a small business owner might opt for an MCA, including:

  • Resolving temporary cash flow issues: You can get a merchant cash advance in as little as 24 to 48 hours to supplement your cash flow. Essentially, it’s a type of same-day funding.
  • Purchasing inventory on sale: If a piece of equipment or materials your business uses are on sale — but you can’t afford them with a business checking account — an MCA provides the cash you need to purchase it.
  • Covering unexpected expenses: Small businesses are unpredictable, so a merchant account will help you get quick cash if you have an unexpected or unplanned expense.
Business & Work, Why Apply for a Merchant Cash Advance?

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  • Paying back other debts: If you have outstanding small business loans or other types of small business financing, merchant cash advances can help you meet payment deadlines.
  • Supplementing working capital: If you foresee having an extensive business order in the near future, merchant cash advances can help you increase your working capital to boost capacity and deliver the order.
  • Getting funding with a low credit score: If your business credit score is low and you don't qualify for a business loan, merchant advance funding can help you get the cash you need.

Pros and Cons of Merchant Cash Advance

An MCA isn’t the best choice for everyone. Look for alternative financing options if:

  • You have a good credit profile and can qualify for a business loan with competitive rates.
  • You do not accept credit card payments, or most customers pay in cash.
  • You expect future sales and credit card transactions to be low.

In these cases, it’s best to rely on other business financing options that better fit your business.

Pro's

  • Flexible repayment options attached to future sales
  • Revenue based business financing, not based on profit/loss
  • Offers business funding despite personal and business credit

Con's

  • Higher costs and rates than that of traditional bank loans
  • Time to repay is typically set for 6 to 12 months to repay
  • Costs are not tax deductible because it's a sale of future receivables

How to Successfully Apply for a Merchant Cash Advance

Small businesses may find themselves strapped for cash at any point in time. Whether you have been a small business owner for a few months or a few years, external factors such as economic downturns or internal factors such as low working capital can make it impossible to continue without a cash boost.

That's where merchant cash advances come in.

The good news is that applying is straightforward and won’t require a lot of paperwork. A merchant cash advance application is easy to fill out, and you could get a better deal than if you were applying for longer-term funding options.

Let's look at the steps you should take to apply for merchant advance funding to increase your chances of qualifying.

Step #1: Choose Your Preferred Merchant Cash Advance Provider

Many merchant cash advance companies are on the market, each with fees and repayment terms.

When deciding which provider you want to apply with, find out about the cost of the MCA and the factor rate. This information can help you understand the percentage of your credit card transactions you’ll have to use to pay back the cash advance. 

Step #2: Create an Account with a Processor

Most MCA providers have connections to their credit card processors for repayments. Signing an agreement with a credit card processor is a must if you want to apply for a merchant cash advance.

You can skip this step if you already work with an approved credit card processor. Otherwise, create an account with a processor approved by your chosen cash advance provider so you can pay back your MCA through your card sales. 

Step #3: Check Your Eligibility

Every merchant cash advance company has its own eligibility criteria. So, as a business owner, it’s up to you to check if you qualify for a merchant advance and compare the differences between providers.

A provider will look at the volume of your credit card receipts to determine the factor rate. A large volume of credit card payments will make it easier to qualify and get a better factor rate, but you might still be able to get a smaller lump sum with a low volume of credit card receipts.

Step #4: Understand Your Credit Score

If you apply for a business loan, your credit score will significantly determine whether you qualify or not. You don’t have to have excellent credit to qualify with merchant cash advance providers. However, it’s still essential to know what your score is.

Your merchant cash provider will look at your personal and business credit scores. You’ll be able to apply as long as you have a 550 or higher. 

How to Successfully Apply for a Merchant Cash Advance

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You can get your credit report from one of the business credit bureaus, such as Equifax or Experian. Remember that bad credit won’t necessarily stop you from qualifying for a cash advance, but it will impact your factor rate.

Step #5: Gather Your Supporting Documents

Once you complete the pre-application steps of choosing a provider and credit card processor, it’s time to fill out your online application. To complete an MCA application, you must have certain documents on hand.

Most merchant cash advance providers have an easy application form where you can fill in your personal and business information. 

Next, you’ll submit these supporting documents:

  • Personal and business bank statements for at least the last six months
  • Business bank information
  • Proof your business has been running for at least a few months
  • Proof of your annual gross sales
  • Proof of your agreement with a credit card processor
  • Documents that showcase your business’s credit card payment volume

The merchant cash provider will use these documents to verify that you meet the eligibility criteria and have enough cash flow to repay the debt.

Step #6: Understand the Terms and Conditions

If you are applying for a merchant cash advance and your application is approved, you should analyze the terms and conditions before signing. Here are some of the elements you definitely need to understand:

  • Payment frequency refers to how often you’ll have to pay back the advance with a percentage of your credit card transactions, such as daily, weekly, or monthly.
  • Factor rate is the interest rate for an MCA. It shows how much money you will pay back at the end of your agreement.
  • Fee penalties are the penalties you could incur if you miss a payment or default on your MCA.
  • Time to funding shows the time it takes for the lump sum to get deposited into your business bank account.

For example, a factor rate of 1.50 requires you to pay 50% more than you received, which could be a substantial financial burden to your business and waste your revenue. So if you borrow $100,000, you may have to pay back $150,000 by the end of your repayment period.

Consider these factors very carefully. Read the fine print with an expert and decide if you want to continue with your application.

If the factor rate is too high, consider requesting a smaller cash advance or a different funding option.

MCAs aren’t considered traditional loans, so they’re not subject to strict banking regulations. As a result, they can come with conditions you wouldn’t find in traditional loan products.

Selling too many of your future credit card receipts may resolve your short-term issues and grant additional cash flow, but in the long run, you could be risking your business assets and the existence of your business.

Step #7: Sign Your Agreement and Get MCA Funding

Once you have carefully analyzed the fine print and decided that the repayment terms of your MCA are agreeable, it's time to sign the documents. 

Signing Agreement To Get MCA Funding

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After you sign and agree to the terms and conditions outlined by your MCA provider, your funds will be deposited. Then the repayment cycle begins.

How Quick Can You Expect a Response to Your Application?

Most merchant cash advance providers have quick approval or rejection times. You could find out if your application is approved the same day you submit your application. This is especially true for many online MCA providers.

Application for Merchant Cash Advance: Reasons You Might Be Rejected

Generally, you won’t encounter many issues in getting approval for an MCA, but there are some factors that could lead to a negative outcome. Here are some of the most common reasons why your MCA might be rejected and what you can do about it.

Reason #1: You Have the Wrong Credit Card Processor

If you are already working with a processor that helps you with credit card sales, you have to check if they’re approved by the MCA provider you've chosen to apply with. Most MCA providers have a list of approved processors, and they will reject applicants that don't adhere to their requirements.

If you get rejected because of your credit card processor, change the company you work with to one that is acceptable and try reapplying.

Reason #2: The Volume of Your Transactions Is Insufficient

Your weekly or daily credit card sales might be too low to qualify for an MCA. If that is the case, the MCA provider will reject your application because they don't believe you can pay back your funding.

If this is the sole reason for your rejected application, try to implement a stricter credit card-only payment rule in your business. That way, you’ll be able to decrease the amount of cash-in-hand transactions and increase credit card volume.

Reason #3: Your Credit Score Is Too Low

Your credit score might be below 550. If it is, you won't qualify for a merchant cash advance.

Application for Merchant Cash Advance

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There are a few immediate actions you can take to improve this score, but to create a significant boost, you’ll need time.

You can consolidate your debt to make it more manageable and commit to making on-time payments. When you do this, your score will increase over time, and you should see at least a slight improvement in a few months. In the meantime, you can ask friends and family for temporary help to supplement your cash flow.

Once your score is higher and you’ve done everything you need to qualify, you can fill out your application for a merchant cash advance!

Alternatives to Merchant Cash Advance

There are alternatives to applying for a merchant cash advance that you may want to consider first but keep in mind that these alternatives have higher credit standards and require more financial documentation to qualify.

  • Small Business Loan- Business term loans with interest rates starting at 9% with fixed rates and terms that range from 12 to 60 months.
  • Business Line of Credit- A business line of credit is a revolving credit facility with a credit limit that as a draw on demand feature unlike term loans. Simple interest is only charged on the outstanding balance. Interest rates start at 1% per month simple interest.
  • Small Business Administration (SBA) loans- SBA loans have the best rates and terms in business lending but come with strict credit requirements and voluminous amounts of paperwork to get approved. Eligibility and approval can be difficult.

Frequently Asked Questions

How To Calculate Merchant Cash Advance Rate

A merchant cash advance has a factor rate which is a fixed cost factor and not and interest rate which is simple interest. You take the purchase price (Payback amount) divided by specified amount (Funded amount) equals Factor rate. The cost between your advance amount and your payback amount is you cost of business funding.

Example. Advance amount $20,000, Payback amount $25,000

$25,000 divided by $20,000 = 1.25 Factor Rate

$25,0000 - $20,000 = $5,000 flat cost of business funding

Can I Get a Merchant Cash Advance With Bad Credit?

Unlike traditional business financing, a merchant cash advance allows for businesses who have bad credit or some type of credit impairment. Your terms will be impacted by credit and will determine factor rate and estimated time to repay impacting costs and payments.

What is the Average Rate & Cost Of A Merchant Cash Advance?

The average factor rate and costs of a merchant cash advance ranges from 1.18 to 1.35 of the funded amount. Origination fees range from 0% to 6%.

Conclusion

A merchant cash advance is an excellent short-term funding option for businesses with a large volume of credit card payments. It can be helpful for purchasing new inventory, improving cash flow, supplementing working capital, and making other investments that will drive business growth.

If you want to simplify your search for MCAs and other business funding options, consider using a small business funding marketplace. That way, you can quickly compare options and get the information you need to make a smart decision.

AdvancePoint Capital helps businesses identify the best possible funding options depending on their profiles. Apply in minutes, view multiple financing options, and get funding in as little as 24 hours.

Apply now!

Jacques Famy Jr

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