Merchant Cash Advances: A Lifeline for Small Business Financing

January 19, 2024

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In the dynamic world of small business financing, the term “Merchant Cash Advance” (MCA) has gained significant traction. For small business owners navigating the complexities of funding, understanding what an MCA is and how it can be a beneficial tool is crucial. This article aims to demystify MCAs, contrasting them with bank loans and other financing options, emphasizing their relevance and suitability for small businesses.

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What is a Merchant Cash Advance?

A Merchant Cash Advance is not a loan, but a financial arrangement where a business receives a lump sum of capital in exchange for a portion of its future credit card sales. This type of financing is particularly attractive for types of businesses that need funding quickly.

How Do MCAs Work?

The process involves a business selling a portion of its future credit card sales to an MCA provider in return for an upfront advance amount. This advance is then repaid through a daily or weekly holdback, a predetermined percentage of daily credit card receipts, making it a flexible option for businesses with fluctuating sales volume.

Who are the best Merchant Cash Advance Providers?

To find the merchant cash advance companies, we recommend looking to unbiased third party reviewers. Trustpilot is a review site where businesses can leave their feedback. Here are some of the top funders based on those ratings:

  • iCapital Funding – rated 4.8/5 on Trustpilot

  • The LCF Group – rated 4.7/5 on Trustpilot

  • Reliant Funding -rated 4.6/5 on Trustpilot

The Appeal of MCAs for Small Business Owners

Quick Access to Working Capital

For small business owners, one of the most significant advantages of an MCA is the quick access it provides to working capital. Unlike business loans, which may require extensive paperwork and longer processing times, the application process for an MCA is typically straightforward, with funds often available within a business day.

Less Emphasis on Credit Score

Don’t worry if you have imperfect history according to the credit bureaus. MCA providers usually place less emphasis on business credit and personal credit scores, making them an attractive option for owners with bad credit. Instead, the focus is on the business’s sales volume, particularly credit card transactions and overall cash flow.

No Collateral or Personal Guarantee

Unlike traditional bank loans, MCAs do not require collateral or a personal guarantee. This aspect can be particularly appealing for business owners who are cautious about pledging personal or business assets.

Qualifications are very straight forward. You’ll need to be sure that you have a business bank account with receivables showing for the last 3-4 months as funders want to see your most recent bank statements. You will also need to be a U.S. based company.

Key Terms and Conditions of MCAs

Factor Rate and Repayment* Amount

MCAs are unique in their use of a factor rate to determine the total payback amount. This rate, typically ranging from 1.1 to 1.5, is multiplied by the advance amount to calculate the total repayment due.

Repayment Terms and Holdback

The repayment period of an MCA can vary, generally ranging from 1 to 12 months, depending on the advance amount and the business’s sales volume. The holdback percentage, usually between 10% to 20%, directly impacts the daily cash flow of the business.

Eligibility and Requirements

To qualify for an MCA, businesses typically need to have a minimum amount of monthly revenue and a certain period of business operation (usually 3-4 months). MCA providers will require bank statements to assess eligibility.

Merchant Cash Advance Versus Traditional Business Loan

Flexibility and Speed

MCAs offer more flexibility and quicker access to funds than bank loans. The repayment terms adapt to the business’s sales, providing relief during slower periods.

Suitability for Small Businesses

For many small businesses, particularly those with a high volume of credit card sales but perhaps less robust credit history, MCAs present a viable and efficient financing option. They are especially suitable for businesses looking for short-term financing to cover immediate expenses or capitalize on quick-turnaround opportunities.

Conclusion

Merchant Cash Advances offer a distinctive and valuable financing option for small business owners, particularly those who need quick access to funds. Their flexibility, ease of access, and suitability for a variety of business needs make them an appealing choice for many small businesses. As with any financing decision, it is imperative for business owners to thoroughly understand the terms and ensure that this type of financing aligns with their business’s cash flow and financial objectives.

*Repayment in this context describes the process of repurchasing a merchant cash advance. It does not describe the process of repaying a loan. MCAs are legally distinct from loan products.

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