Best Alternatives To Merchant Cash Advances

Merchant cash advances are similar to paycheck advance in theory. The basic difference being that paycheck advance is meant for individuals while merchant cash advances are meant for businesses, mainly small businesses.

Businesses such as retail stores, medical offices, eateries, restaurants, or any business with steady sales recorded on debit/credit card usually go for merchant cash advances. Also known as MCA or Business Cash Advance, MCA has become one of the most popular kinds of small business financing.

How does a Merchant Cash Advance work?

A merchant cash advance might seem very similar to a short term loan, but there are considerable differences between the two. One of the main differences being that they are governed by completely different regulations. Also, the turnaround time for MCAs is quicker than that of small business loans.

Merchant Cash Advance lending origination software looks into the volume of credit sales , business turnover, business authenticity etc. as factors to consider creditworthiness. This means higher risk based on an predicted business cash flow hence it is covered by a flat fee and a percentage of your daily sales till the MCA is recovered in full.

Therefore, an MCA is a cash advance against any future sales a borrower makes for which he receives the revenue through credit/debit card sales.

Unlike a short term loan, MCAs don’t have a flat interest rate or an APR (Annual Percentage Rate) that is applied to the principal amount. Instead, the final amount is calculated based on a common factor rate. This rate usually oscillates between 1.2 to 1.5. And the amount given as advance through an MCA could vary anywhere from $1000 to north of $200,000. As an example, if you borrow $20,000 at a factor rate of 1.3, then the total repayment amount will come to $26,000. Whatever the amount paid in advance, the window for return is usually set within a year.

How Mechant Cash Advance Lending Software supports the MCA business?

Modern day cloud based Merchant Cash Advance Lending Software support Merchant Cash Advance Loan Origination by enriching borrower data by connecting to various business databases to ascertain business health and credentials and provide an automated factor rate recommendation based on the lender’s credit policy.

For Merchant Cash Advance Loan Servicing the platforms connect to various payment gateways or create automated banking instructions to drive efficient collections. The Merchant Cash Advance Lending Servicing Software is setup to collect or send collection instructions for a predetermined percentage of the daily, weekly, biweekly or monthly sales as per the terms of the loan repayment frequency. e.g. deduction or repayment percentage = 10% of daily debit/ credit card transactions.

When to consider MCA?

You can consider an MCA when you need a quick cash injection for your business and your credit standing or prior loans are making it difficult for you to source loans. However, you need to be extra careful of double-dipping in such a case, as taking out a loan to fund the interest of another loan could send you and your business into a debt spiral and you wouldn’t want that. If you are taking an MCA from your current MCA funder, ask them pro-rate the original MCA in the merchant cash advance lending platform first. This way you will not be paying interest on interest.

Here’s a glance at the pros and cons of Merchant Cash Advances

Understanding the pros and cons of MCA can help loan applicants find out if MCA is the best loan option for them out there, or if they should look at some other alternatives.

1. Pros of Merchant Cash Advances

  • Flexibility
  • is the biggest pro when it comes to a merchant cash advance. There are no set repayment terms, which means you can pay your percentage based on your cash inflow. If your sales are low for a particular week, you pay a lower percentage. On the contrary, if your sales are higher you can pay off a larger amount. If you do have consistent sales revenue coming in, you can even pay off your MCA earlier.

  • Quick application
  • ranks as the second reason why you could choose MCA over other small business loans. Merchant cash advance software ensures easy approval and disbursal that can be done in a week at the most. Creditworthiness, as mentioned earlier, isn’t much of a factor for lenders, in this case, so qualifying for an MCA is also plenty easy. Your sales history will play a bigger role in getting an MCA instead.

  • Zero collaterals
  • make MCA a great option for businesses with limited assets.

    2. Cons of Merchant Cash Advances

  • High cost
  • , is one of the major cons of MCAs. Paying back a high sum in a year and a half or lesser, purely based on the volume of your business is risky. As an example, if you borrow $20,000 at a factor rate of 1.3, then the total repayment amount will come to $26,000. The cost of this loan would be $6000. This comes around to a 30% interest rate if you were to pay off the loan in a year and calculate APR on the loan amount, which is co