Merchant Cash Advance: Everything You Need to Know
A Merchant Cash Advance (MCA) or Revenue Advance is an alternative business funding source that can be used when collateral or credit score is lacking. Unlike a traditional loan, an MCA is the purchase of a business’s future credit card sales. Unlike a traditional loan that requires a fixed monthly payment, the business will only make flexible daily or weekly remittances to repay the revenue advance based on a percentage of actual future receivables until the loan amount is paid off.
If your business relies on credit card sales, you already have a merchant account that allows you to accept and process your transactions. A merchant cash advance can provide you with an upfront payment in exchange for a portion of your future credit card sales.
The merchant account provider will assess your ability to repay the loan and assign a factor rate from 1.2 to 1.5 depending on the risk involved. The higher your factor rate and associated risk, the higher the interest rate. This rate is multiplied by the amount of the advance to find the total repayment amount. For example, if you get an advance of $10,000 and your factor rate is 1.2, you will eventually repay $12,000.
What Are the Repayment Options for a Merchant Cash Advance?
If you opt to repay this loan with a percentage of your credit card sales, the term for the merchant cash advance will be between 3 and 12 months. The more sales you receive during that time, the faster you will repay the loan. Let’s say 10 percent of your credit card sales are deducted until you reach the $12,000 repayment figure above. If you typically earn $20,000 in credit card sales each month, the loan will be repaid within about six months. If your revenue drops to $10,000 per month, it will take 12 months to repay the loan. If sales fluctuate during the repayment term, it can take much longer to pay back the loan than originally expected.
What Are the Benefits of a Merchant Cash Advance?
Many small businesses appreciate the advantages of this loan alternative, which include:
No Need for Collateral or Credit – A Merchant Cash Advance will be a relatively safe way to receive cash. Traditional loans will always affect credit scores, but an MCA is only dependent on future sales. That is why an MCA is not present on any credit report. Losing collateral is not a risk, however, you may be asked to sign a personal guarantee.
Fast Collections and Applications – Funding will always be faster than a traditional loan, sometimes in as little as 24 hours, and the process is simple and straightforward. With a traditional loan, lenders will evaluate tax returns, financial statements, and the current business plans. However, MCA providers typically consider 2 main factors: length of time in business and monthly deposits via credit cards sales. Approvals are almost always certain if a business has monthly credit card sales over $5,000.
Fast Access to Cash – There is minimal paperwork needed so the turnaround time is very fast. A traditional loan can take months to process, but funding through an MCA is usually available within 1-2 business days. This is particularly important when immediate funding is needed.
Really High Approval Rate – Traditional lenders such as banks have made it extremely difficult for small business owners to qualify for loans. Banks reject upwards of 80% of the small business loans due to bad personal credit scores of the borrowers, limited time in business, collateral requirements, and other red tape. MCAs have the highest approval rates in the industry. Advances are rarely denied as long as borrowers meet the minimum requirements.
Collections Based on Revenue – One of the biggest issues with traditional bank loans is that they require a fixed monthly payment. If the company is facing a hardship, it will have trouble making the monthly payments. With a merchant cash advance, repayment is based on a percentage of actual future receivables meaning you only pay when the business is generating profit.
Amount You Can Borrow – Some companies offer cash advances of up to $750,000, which is enough to make real estate purchases, pay for heavy equipment, and finance other major improvements that can help your business.
What Are the Disadvantages of a Merchant Cash Advance?
You may want to rethink applying for a merchant cash loan because of these potential drawbacks:
Traditional business loans are repaid over time, which means the sooner you pay back the loan, the less interest you’ll pay over the life of the loan. This strategy doesn’t work for a merchant cash advance since you are repaying a fixed amount.
Because a merchant cash advance is considered a commercial transaction rather than a loan, it is not regulated by federal laws. Instead, these financial products are governed by each state’s Uniform Commercial Code, which means regulations about merchant cash advances vary from state to state.
Some companies rely on confusing contracts with a repayment structure and fees that are difficult to understand. You also do not receive an APR on this type of loan, which makes it challenging to compare a merchant account cash advance with traditional means of business financing. Before signing the loan documents, make sure you understand the terms and conditions they contain.
This type of loan does not build good credit because it is not reported to the credit card bureaus (TransUnion, Equifax, and Experian).
How Do I Apply for a Merchant Cash Advance?
In most cases, you need to be in business for at least six months before qualifying for this type of financing. You also need to be set up to process credit card sales. Some merchant cash advances are approved on the same day. After you receive an approval, you’ll typically receive the funds in your account in about 1-2 business days. These are the steps in the application process for a merchant cash advance:
Complete the funding application which asks you to provide information about your business, including your business tax ID and your Social Security number.
Provide required documentation, which is usually the last 3 months of business bank account statements and credit card processing statements along with a copy of your business lease.
Once the details of the loan are finalized and paperwork is signed, you’ll receive the funds in your account within a few business days, and the payback process will begin right away.
What Should I Look for in a Merchant Cash Advance Lender?
Before committing to this type of financing research the lender to make sure they are reputable. Find out how long they have offered merchant cash advances, what percentage of financial applications are accepted, how long it takes for a request to be approved or denied, and how long it takes to receive the advance after approved.
If you think your business could benefit from a merchant cash advance, consider applying through ACR Funding. We offer approvals within 24 hours and do not charge an application fee. Contact one of our representatives today to learn more about our services.