Merchant Cash Advance
If you’re seeking funding for your small business, a merchant cash advance (MCA) may be the solution to your problem. MCAs are widely used as an alternative to traditional loans. They’re an option for business owners who want to avoid the lengthy approval processes and strict credit requirements that come with most traditional bank loans.
Of course, all funding options such as loans, revolving credit, and cash advances have their specific advantages and disadvantages. It’s a good idea to fully understand what you’re getting into before you choose to commit to a merchant cash advance or any other type of funding.
What is an MCA?
MCAs are financial products, not to be confused with loans. An MCA is when a lender purchases a percentage of your future credit card sales. When you apply for an MCA, the lender will look at the credit card deposits of your business to determine if you have the capacity to pay back funds based on your daily credit card sales.
A merchant cash advance agreement with a lender means signing a merchant cash advance contract. The fees will be included in the contract along with the methods of collection. The contract will typically state no fixed date of repayment since the advance is only considered paid once the principal and predefined interest are fully collected. Some contracts will go into detail about the screening process the lender uses to determine eligibility.
MCAs are typically for businesses that need access to quick capital to cover unexpected expenses. Business owners can use the advance for a number of things such as purchasing materials for a large order, hiring new employees, preparing for a high-demand season, emergency repairs, or buying new equipment. A merchant cash advance is an option for businesses that are relatively new and don’t yet qualify for a traditional bank loan. It’s also ideal for small businesses that don’t have enough assets to provide as collateral. If you are seeking short-term financing, MCAs offer that along with flexible repayment terms. MCAs are available for any type of business, regardless of industry and size, that has a consistent flow of credit card transactions. It’s also one of the few options for any business that has less-than-perfect credit. Credit score requirements will vary from lender to lender. Some firms will look at credit scores while others will only care about your current capacity to repay the advance. The lender will take a percentage of credit card sales, and the business owner only needs to assure the lender that their daily credit card sales are steady enough to guarantee repayment. They can prove this by presenting 4-6 months of bank statements of business operations.
Requirements for a Merchant Cash Advance
Here are requirements in order to be considered for a merchant cash advance:
- Completed and signed lender application
- US Credit Score of 540+
- Must provide valid state issued identification
- 3 months bank statements and current month-to-date (MTD)
- Voided Check
- Articles of incorporation, EIN documents, and certificate of good standing
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How quickly can I get funded?
The MCA application process is usually very simple. Depending on the paperwork, a merchant cash advance is decided anywhere between hours to a few days. Once the business owner is approved for an MCA, they may receive the funds in their account in just two short days.
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Is there any required collateral?
If you fail to pay the advance, you are not at risk of losing any business assets that you may have. Merchant cash advances are tied only to future sales.
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How does an merchant cash advance work?
The amount that you are eligible to advance will depend mostly on your average credit card sales. Depending on how much you need and how much the lender decides you are qualified for, the MCA (Merchant Cash Advance) can be as little as 50% of your monthly sales or all the way up to 250% of your monthly sales. To repay the cash advance, a small percentage is calculated and taken with each credit card sale over the repayment period. The agreed-upon percentage is called a “holdback.” The lender withholds that amount each day until the cash advance is paid back in full. The holdback is also referred to as the “retrieval rate,” and it can be anywhere between 5% and 20% depending on the lender, the amount of your advance, your daily credit card sales, and the agreed repayment period. The advance amount will also determine the term or repayment period, which can be anywhere between 90 days and 18 months. If your business is doing well and is receiving more credit card transactions, you’ll repay the advance sooner. And because repayment is based on a percentage, in the event that your sales are low on a certain day, the amount taken from you is relative to your incoming cash flow.
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