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.
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.
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.
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.
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.
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.
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.
make MCA a great option for businesses with limited assets.
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 considerably higher than the APR on short term loans.
could creep up as a chunk of your daily sale will wind up in the ACH to be paid back to the MCA lender. Thinning cash flow over a period of time could mean that you would need another loan or an extension to keep operations going.
Traditional banks are wary of giving loans and advances to small businesses. This makes it difficult for small business borrowers to get loans. Alternative lending has done a lot in the past decade to improve the condition of these small businesses by giving them a host of easy loan options with different repayment schedules. If you feel that MCA is a bit risky for your business model, here are some other alternative lending models you could choose from:
Thanks to digital lending software, it is easy for borrowers to expect quick approvals and disbursals for short term business loans as well. These loans can range anywhere between 1 to 5 years and have a fixed repayment schedule based on an APR. Most of the paperwork and background checks are conducted online for these loans, especially when serviced by alternative or peer-to-peer lenders.
Also known as invoice factoring, these cash injections help small business owners sell their receivables to alternative lenders for a certain fee, thereby receiving instant money against their invoices-issued. The fee covers the risk of bad-debts for the lenders.
A business line of credit is one of the most popular forms of alternative loan options available to small businesses. Its flexible nature allows business owners to draw funds, as and when needed, to boost working capital and repay the amount when they have a surplus cash inflow. It’s the best way for immediate financing needs to restock inventory, cover gaps in cash flows, etc.
These loans are perfect for financing the purchase of equipment, such as vehicles, machinery, or computers. In this case, the equipment acts as the collateral for the loan itself, which lets small business owners borrow 100% of the cost of equipment from the lender.
Although merchant cash advance is still prevalent in small business circles, the above-mentioned alternative lending options gives borrowers some excellent choices that give MCAs tough competition when it comes to quick turnaround time and flexibility. If you are a small business looking for a loan, do make sure to zero down on exactly what your loan requirements are and also maintain a good credit score, so that you always have more than one alternative loan options available to you.