Merchant Cash Advances help inject cash into businesses faced with a negative working capital situation or are on the brink of going out of business. Although it is one of the many different working capital funding options available in the market, yet it remains the frontrunner in providing business owners with some much-needed breathing space when it comes to immediate liquidity.
In this article, we explore 9 such features that make merchant cash advance a popular go-to option for businesses suffering a cash crunch.
How does merchant cash advance work?
The reason why merchant cash advances are popular lies in the manner of its sourcing. As the name implies, it is a cash advance to a small business, preferably ones whose revenues mostly come through debit and credit card sales. As such, these cash advances work best for retail stores and restaurants. They work well for B2Bs too, who might be charging their clients a retainer or running a subscription model by charging the same on their business cards.
The reason why debit and credit card swipes matter so much in merchant cash advance is that that is how repayment works in these advances. Merchant cash advance providers give small business owners the advance in exchange for a daily percentage of their debit or credit card sales. While the percentage to be deducted is fixed, the amount is not. This reduces the pressure on business owners to meet a daily sales target for repayment requirements.
Although merchant cash advance is not a new concept when it comes to working capital cash injections, the way these advances are currently processed and handled has changed significantly. This has been possible thanks to merchant cash advance software and merchant cash advance lending platforms, that have made it easier for advance providers to churn and approve applications more quickly and decide on the percentage fee more accurately, thereby reducing risk for both the MCA providers and the borrowers.
Why should you consider a merchant cash advance?
Here are some reasons why you should consider a merchant cash advance:
Negative working capital is not unheard of in business. Especially, small businesses. With a list of accrued incomes, bad debts, investments and expenses, small business owners find it difficult to keep the finance engine well-oiled. So, if you are a small business owner that is in desperate need of some cash to stay afloat, a merchant cash advance can help you, pronto.
If your business revenue comes through debit and credit card swipes then applying for a merchant cash advance (MCA) should be a no brainer. Merchant cash advance providers check the sales revenue of the applicant for the past 12 months to generate a forecast of what future sales are going to look like. They will then decide upon a percentage fee that they’ll charge on your everyday transactions based on this forecast. The fee generated from the card sales will be directly credited to an escrow account from where the merchant cash advance provider can realize it.
The burden of repayment is huge for small business owners. For other working capital loan options, such as small business loans, line of credit, and factoring, you need to have a certain amount in sales, must have active invoices (not an option for restaurants and retail businesses), or see sudden influx or efflux of cash that can be supported by LOCs, perfect for manufacturing companies. For smaller businesses that see consistent daily sales, a merchant cash advance is the best option. As explained earlier MCA providers use merchant cash advance lending origination software, which makes it easier to calculate a fee percentage that is comfortable for both the business owner to cover and the MCA provider to realize.
MCA is one working capital loan option in which the advance providers are not interested in the creditworthiness of the business or its owner. They are more interested in their annual revenue generation capability and if they can continue meeting the daily percentage fee requirements of the provider. So, if you are worried about not being able to secure a business loan because of your credit rating, you should consider an MCA.
This might seem impossible if you are thinking of any kind of small business loan, as lenders usually don’t provide collateral-free loans and even if they do, the interest rates tend to be sky-high. So whether you do not have an asset that you can mortgage or you have already mortgaged the ones you have, a merchant cash advance should help you with your cash crunch without the need to put down a collateral for the same.
When business owners don’t have access to collaterals or their business does not have a credit rating yet then they might end up taking a personal loan to fund the cash deficit in their business. However, since personal loans are unsecured, business owners need to take complete responsibility for them thereby putting their personal assets as well as their personal credit rating at risk. This is a risk you might not be willing to take.
MCAs promise affordability, as MCA providers fix the percentage fee on daily revenue based on your past annual revenue. As such, they are convinced that you are going to make a minimum of the said annual revenue and thus, the percentage daily fee cut should not really impact your cash inflow and help you keep your business funded. Again, please note that MCAs do not cut a certain amount every day, but only a percentage of total card-based sales.
As mentioned in the last point, the percentage fee ensures that you don’t have to part with a pre-decided amount every day, instead, you will just need to pay a percentage of the sales you make on any particular day. This added flexibility in merchant cash advances helps business owners navigate through their working capital struggles easily.
Access to small business loans and working capital loans from traditional banks and peer-to-peer lenders (P2P lenders) need businesses to have an acceptable credit rating and meet a bunch of requirements and criteria. The turnaround time for such loans is longer as compared to merchant cash advances, too. Things can be more difficult if you are a new business and do not have much credit history to reflect and assist the process of loan origination. This makes MCAs a better option for small business owners.
Merchant cash advance makes a great choice for small business owners trying to fill their working capital gap. They are quick, easy to access, affordable, flexible, and do not need a credit rating. All you need to do to receive a merchant cash advance is to show annual revenue for the past year and make sales through debit/credit card. The ever-evolving merchant cash advance software is making it easier for MCA providers to extend advances to business owners at better terms, thereby making it a popular working capital loan option for many.