What is a Merchant Cash Advance (MCA)?
Merchant Cash Advances or MCA"s (also now as a Future Receivables Purchase and Sale Agreement) is an advances of a lump sum of money to a company in exchange for a fixed greater amount (purchased amount) than the specified amount (purchase price). The repayment process for a Merchant Cash Advance hinges on the holdback percentage, which is usually between 10% and 20% of daily credit card receipts. This ensures that the repayment rate is proportional to the business's sales volumes, hence offering a harmonious relationship between cash flow and debt servicing. For instance, if a business's holdback percentage is set at 15% and it sees $5,000 in credit card transactions for the day, the automatic deduction would be $750. This repayment model provides a measure of financial breathing space, particularly during slower business periods.
Despite this flexibility, it's important to note that the convenience of an MCA comes with higher financing fees compared to options such as working capital loans, which often feature competitive interest rates and flexible repayment terms. At the heart of MCA costs is the factor rate—a fixed cost applied to the cash advance—potentially leading to higher overall financing costs. However, for businesses that value rapid access to capital and the absence of fixed monthly payments, an MCA can be an attractive form of short-term financing, despite the potential for a higher repayment rate in the long run.
A merchant cash advance, even a bad credit merchant cash advance is not like traditional bank loans because it's advance funding by selling your future sales and/or future credit card receipts at a discount. It is correct that merchant cash advances have no personal guarantee to the business owner, but rather a business owner’s performance guarantee. This product is a fast funding method for a company that needs money fast to support cash flow.
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Merchant Cash Advance: Product Overview
- Merchant cash advance rates: 1. 10% up to 1.45% Factor Rate (This is not an interest rate/APR like bank loans or other traditional small business loans)
- Repayment terms: No term limits. Estimated payback periods are 6 to 18 months, tailored to accommodate the sometimes volatile cash flow of retail businesses and other inventory-dependent companies.
- Fees: Typically 1% to 3% Origination Fees, which is relatively minimal considering the speed and flexibility of the lending process.
- Payment Terms: Set percentage of future card sales volumes as payment, which aligns seamlessly with businesses already working closely with credit card processors.
- Business Credit Standards: Both business owners' personal credit score and business credit are evaluated by MCA providers. All business credit types from poor credit to good credit to Excellent credit are considered. Not a business credit score-driven, so personal credit bureaus can show poor credit.
- Documents: One-page Application, credit card payment processing statements, and business bank statements to get a merchant cash advance offer.
Merchant cash advances are an easy and fast way to get funding for your business compared to traditional loans or lines of credit. Traditional loans and lines of credit also have high credit requirements for both personal and business credit scores. The lending landscape is evolving, with the merchant cash advance market anticipated to reach $3 billion annually by 2029, reflecting its growing popularity among small businesses. For those hesitant about merchant cash advances, a financing company can offer alternative solutions like equipment financing, which tend to have lower interest rates and longer repayment terms. It's important to understand that equipment financing, could provide up to $5 million in funds with repayment terms typically ranging from four to 120 months, potentially saving your company more in the long run. Our goal is to assist you in comparing the options available for your specific business needs.
We’re here to partner with small business owners and help them navigate the challenging financial roadmap. Choosing between merchant cash advances and consulting with a financing company for options like equipment financing can be complex. We’re all about empowering small business owners with the ins and outs of merchant cash advance services, ensuring you are well-informed when considering such options. Transparency is paramount for us, and we strive to help you understand the rate implications and potential benefits of alternative financing, such as the possibility of lower interest rates and longer repayment terms offered through equipment financing, compared to MCAs. Our funding advisors prioritize transparency to ensure you make the best financial decisions for your company.
How Does a Merchant Cash Advance Work?
Merchant cash advance companies provide small businesses a lump sum payment of money upfront by a business owner selling a small business’s future transactions at a discount and have to pay back a greater amount called the specified amount. Repayment of a merchant cash advance is a collection of a set percentage of future credit card processing batches. The estimated time to repay is typical may be set to 6 to 18 months depending on the risk of the file but could be longer as there are no limits to the repayment period as the repayment is based on credit card transactions in the future and comes directly out of the bank account.
Because the repayment process is attached to the business’s future credit card processing, this method makes it perfect for most of those who need money fast but flexible programs due to revenue fluctuations. The cost, also known as the factor rate ranges by risk from 1.10% to 1.50% percent of the purchase price. So, if you have slow revenue, don’t worry. Companies don’t need to pay a fixed payment that day and instead can rest easy with a merchant cash advance knowing that it will deduct a fixed percentage.
Another piece of good news about the repayment of a merchant cash advance is there is no set term to repay because of the repayment method. Merchant cash advances are not loans against credit card sales or a line of credit, but it is the funding of revenue, so the correct term would be merchant advance. Therefore, it is incorrect to use the term “Loan” because it’s not a loan or call a merchant cash advance company a lender, they are a funder even as bad credit cash advance direct lenders.
To Qualify for a Merchant Cash Advance, a Small Business Owner Must Have:
- The business must process credit cards from customers on a regular basis. (Acceptable volume of your daily credit card sales from the merchant account.)
- Open and active personal credit with payment history
- Operating Business bank statements.
Merchant Cash Advance Eligibility Requirements
- Simple one-page application
- Merchant Processing Statements from the merchant account.
- Business Bank Statements showing consistent cash flow. It's critical to provide documentation that demonstrates this consistency, as it plays a significant role in the financing application process for a merchant cash advance.
- NO TAX RETURNS ARE REQUIRED! This can be a major benefit for startups that may not yet have the extensive history of filed tax returns that other financing sources may require.
- Business owners' credit is evaluated but can be anything from excellent to bad credit. Although credit is a factor, equipment finance companies may offer more flexibility, making merchant cash advances a potential option for startups with no money.
- A minimum of 6 months in Business
- NO START-UP BUSINESSES — Startups looking to secure funding might consider small business grants or crowdfunding as alternative sources of startup financing.
Who Can Qualify for Merchant Cash Advances (MCA)?
The good news is that a merchant cash advance is much easier to qualify for compared to other traditional loans and lines of credit. But there are still qualifications for this type of funding – for example, an applying business must have credit card sales and regularly accept credit cards from customers.
Merchant cash advances are a perfect option for small businesses relying primarily on high credit card sales and debit card sales. Merchant cash advance funders also prefer small businesses with these qualities because it reduces their risk with funding. Additionally, a Merchant cash advance funder may decide to cash advance merchant money if the merchant feels it will not negatively impact the cash flow.
Many small business owners rely on this type of funding for working capital and flexible repayments:
- Restaurants
- Auto service centers
- Dry cleaners
- E-commerce stores
- Retail stores
- Seasonal companies
- Any business that relies on card sales
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What is a Business Cash Advance?
Business Cash Advance (BCA's), also known as Purchase of Sales Agreements, advance a lump sum with a discounted purchase price, also known as a specified amount, to pay back. That cost is a “factor rate” or fixed cost and not a principal and interest rate (APR) like a small business loan. The advance is repaid by taking a fixed percentage of sales based on future overall total sales, which is different than a merchant cash advance, which takes a fraction of future sales. Pay is collected by fixed daily or weekly payments deducted from a business bank account, which is based on the fixed amount of future total sales.
Reconciliation of payments can occur after every month if the fixed payments taken are more than the set fixed future percentage of future business revenue in the agreement. A refund back to the merchant can occur if an overpayment is made month to month while a payback balance exists. This repayment continues until the payback amount is paid back in full. Therefore, there is no fixed repayment period with advances as the fixed payback percentage is attached to sales in the future. This financial process mitigates credit risk by allowing the monthly collection of payments to be adjusted, unlike a short-term loan. The key is the payment process. This is not a loan or lines of credit, but an advance, so it is incorrect to use the phrase “BCA Loans” or call a funder a lender.
BCA companies estimated repayment periods associated with credit with expectations of being typically repaid in 6 to 18 months, but again, it may be longer or shorter depending on future sales as the time period is not set in stone like a short-term small business loan.
Can I Qualify for Business Cash Advance with Bad Credit?
BCAs, like MCAs, are far easier to qualify for than traditional bank business loans. Even though it’s easier to get a business advance, there may still be restrictions on this type of cash advance. This type of advance is another business financing option perfect for a business owner who doesn’t rely on credit cards or debit card sales for their sales deposits and may have bad credit. Anyone can qualify for a business cash advance even if they have low or bad credit.
Merchant Cash Advance: Pros and Cons
Pros
- Rapid finance option for cash flow problems
- Allows bad credit. The business credit profile is not a big factor. All credit is considered but Substandard, Mid-Prime to Subprime Credit are all acceptable. Other products, like term loans, require much higher credit standards than MCA or BCA.
- Much higher approval rates than traditional financing
- May not require hardly any business credit
- No personal collateral is required.
- Flexible payment options attached to a percentage of sales in the future with no term limit to repayment terms.
- Approval may be given even if you have a low monthly or annual revenue.
- No financial statements are required (Tax Returns, Balance Sheets, or Profit & Loss)
- Concerns about business bank statement issues, such as low daily balances and/or Overdrafts or NSFs, can still be approved.
- Only a minimum of 6 months in business is required. You don’t need to wait for 3 years in operation.
- If you have the need for speed, this may be the financing for you. When you need money faster than the traditional process allows, a BCA gives you quick access to receive funds in less than 24 hours.
Cons
- Not a conventional loan.
- Higher costs with MCAs than SBA loans versus interest rate on business term loans and business lines of credit.
- Reports credit history to appropriate business credit bureaus.
- Time to repay, MCAs paid back in months not years.
Document Requirements for an MCA Approval
For swift approval of a Merchant Cash Advance (MCA), you’re in luck as the necessary paperwork is minimal. You will primarily need:
- One page application
- Your Business Bank Account Statements
- Merchant Account Processing Statements, only if you accept credit card payments from your clientele (optional)
Although other financing options might bog you down with extensive documentation, qualifying for an MCA is refreshingly straightforward, often requiring little more than those basic documents. With such streamlined paperwork, you could see the funds in your account in no time.
Why do You Need a Merchant Cash Advance?
The most common uses of acquiring Merchant Cash Advance (MCA) can be:
- Access Working Capital
- Cash Flow shortages
- New or Used Equipment
- Expansion
- Emergencies
- Advertising or Marketing
- Legal issues and licensing
- New Projects
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Frequently Asked Questions (FAQs) about Merchant Cash Advances
Apply for a Merchant Cash Advance Today!
If you want to apply for a Merchant Cash Advance, AdvancePoint Capital is here to help. We offer a wide variety of trusted resources and alternative small business funding options for businesses throughout the country. We’ve helped countless business owners make sure they get the funding options they need with a variety of financing options, whether it’s through a Business cash advance, Small Business Line of Credit, Small Business Loan, Long Term Business Loan, or various other business term loans.
Choosing between the various merchant cash advance lenders can be a nightmare, especially with factor rate options that may have wide ranges. However, we’re all about empowering businesses like yours with premiere cash advance services to fulfill your small business financing needs. For businesses looking for cash advances quickly and with simple application processes — AdvancePoint has you covered. We’ve been a trusted finance marketplace provider for countless business owners. With no term loan limit cash advances that you can receive sometimes in as little as 24 hours regardless of your credit score — there’s simply no better method available.
Check out How to Find the Best Merchant Cash Advance provider to weigh all the benefits and evaluate the decision to get funding.
