“Similar to payday advances for individuals, a Merchant Cash Advance can help business owners keep their doors open.”
Small business owners, like individuals, can find themselves struggling to make ends meet. In addition to maintaining personal expenses, businesses owners must meet the demands of their business operations. Rent, utilities, equipment leases, supply, and payroll expenses are just a few line items on their monthly expense report.
When their cash flow is stalled due to unpaid invoices, business owners need access to funds. One way to get the money they need is to seek a Merchant Cash Advance or MCA.
Funds are easier to get than taking out a traditional loan with a bank. However, the terms may not be as favorable as a bank loan.
Are you a business owner in need of working capital and a way to secure funding? Keep reading to learn more about the benefits of merchant cash advances.
How Does a Merchant Cash Advance Work?
A merchant cash advance is a loan based on anticipated revenue from a company’s anticipated sales. Most lenders, however, do not associate the term “loan” with the financial service they are offering.
Instead, the model is seen as an investment into the company. In exchange, the financial services company receives a percentage of your future sales. With a traditional lender, the client receives money and has a set monthly schedule to repay the loan.
Both providers use a scoring metric to determine creditworthiness and the customer’s ability to repay the money.
Who Can Apply for an MCA?
When MCAs were first created, the goal was to reach merchants waiting on credit card receipts to clear. If a business was using a third-party merchant service, the wait could take longer as money was transferred from the merchant account to their business bank account.
A delay of three to five days will significantly impact a business relying on these funds to restock merchandise, pay vendors, and other expenses. The benefits of merchant cash advances allowed business owners to stay afloat and repay the MCA once the money hit their account.
Today, the use of MCAs has expanded to businesses not relying on credit card payments to settle. With this move, MCA service providers have been able to offer cash assistance to more small businesses.
Factoring Rate
By the fifth year, 50% of small businesses are still in operation. MCA eligibility has played a part in some of these businesses being able to remain operational.
When a business owner reaches out to an MCA provider, there is a risk assessment. The assessment is called a factoring rate. The factoring rate is applied to the loan and establishes the total amount that is repaid.
With credit reporting, the lower the credit score, the higher the interest rate. The factoring rate is the opposite. The higher the factoring rate, the higher your fees.
Adverse impacts to your factoring rate include low sales or slow repayment on a previous merchant cash advance.
Measuring the Pros and Cons
With any business decision, you’ll need to weigh the pros and cons. What works for one business may not work for yours. MCA risks are real and should be taken into consideration when making your final decision.
Let’s look at both sides.
Pros
Unlike Small Business Administration (SBA) Loans, MCA eligibility can take as little as 48 – 72 hours. If you’ve ever applied for an SBA loan you know it can take months for approval.
The benefits of merchant cash advances are the lax rules when it comes to credit. They are more concerned with your ability to repay the money than your credit score.
There are limited or no stipulations on how the money is spent. Whereas, traditional business loans require the business owner to specify how the money is spent.
MCAs do not require business owners to put up collateral.
Cons
The reason traditional banks have such stringent rules and requirements is that they want to mitigate risks. The MCA risks fall in the lap of the company providing the cash to the business. For this reason, a merchant cash advance will be more expensive than a traditional loan. APRs can go as high as 200%.
Repayment typically requires daily or weekly payments. This, in turn, could hinder your cash availability. Like most non-traditional borrowing methods, timely repayment does not help build your credit.
Although your payment history might not get reported, if you default, the collections could get recorded.
MCA Benefits
You need an infusion of cash for your business, and you need it fast. MCA benefits businesses that have no other options for financing. Keeping a business afloat during slow months, purchasing equipment, or handling an unplanned expense is easier to manage.
If your company has steady sales and accepts credit card payments, look at it as a short-term loan to help stabilize your business.
Understand the Terms & Conditions
Whichever method you choose, it’s essential to understand the terms and conditions of the contract. Only accept terms you can successfully repay. Merchant cash advances are expensive, and the MCA risks can far exceed the MCA benefits when misused or are used to keep a business afloat long-term.
Is MCAs Right for You?
Only you can determine if a Merchant Cash Advance is right for your business. Sometimes things happen beyond our control, and it’s good to have additional options when money is low.
Weigh the pros and cons and make sure you understand the risks. Like any financial transaction, lending money is a business and comes with associated costs.
Hasanov Capital is here to help small businesses get the financial relief they need. We have funding programs to fit every situation. Plus, our process is quick and confidential.
Click here to access our quick and easy online application.
