Is a merchant cash advance right for your business? – Forbes Advisor
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A new small business is always looking for ways to grow in the short term so that the founders can get closer to achieving their long term goals. That’s why a merchant cash advance (MCA) is an option: it allows a business to get cash quickly without going through the more rigorous application and approval process of a small business loan. . Before you go out and get an MCA, it’s important to determine if it’s right for your business. Here’s what you need to know.
Note: This article is intended to provide a definition of what an MCA is and what it does, and should not be considered financial advice. We encourage small businesses to research all loan options available to them before committing.
What is an MCA?
A merchant cash advance comes from a lender and is different from a traditional bank loan. A merchant cash advance lender will review your credit card receipts and assess how much you need and how much you could repay. The contract you sign with the MCA lender will state how much you get and how much interest you have to pay back. Interest rates can vary widely from company to company. The state in which your business is based also plays a role in how much you will ultimately have to pay, as some states place limits on interest rates.
What does an MCA lender buy?
Simply put, the MCA lender buys your future sale transactions. You have a contract with them and MCA lenders will assess your sales to see if you are eligible for them to lend you money, but the importance of an MCA is that they give you a quick cash injection.
If you have water damage that you want to fix in your cafe, but don’t have the funds to repair it, an MCA could be an effective way to quickly raise funds for those unforeseen repairs.
How does an MCA work?
Although obtaining an MCA is not as rigorous as a loan approval process, an MCA is not simply an unconditional bag of money. There is a contract with stipulations that you should be aware of when seeking a cash advance to help your business.
In the MCA contract, this is the agreed amount that the lender will give you as a cash advance. It is important to assess and request exactly what you need, otherwise you will have more to pay back. The advance can be less than, equal to, or significantly more than your monthly sales. It really depends on how much you need and how long you are comfortable repaying your daily sales to your lender.
This amount will be greater than the amount of the advance, because an MCA lender charges a fee, called a factor, on top of the money they lend you upfront. In some cases, this amount can be much higher than the interest rate on other types of loans.
While you’re working to pay off your cash advance, you’ll need to withhold a daily amount from your credit card transactions. Before getting a merchant cash advance, you should look at your sales and see how viable it will be during the payback period.
Advantages and disadvantages of an MCA
Needing cash fast is an unfortunate problem for many small businesses. Before taking out a cash advance from a lender, reviewing the pros and cons will give you a better idea of ââwhat to expect.
The biggest benefit of an MCA is getting the cash you need for your business quickly. If you have a project or improvement that you want to make to your small business and you need the money to make it happen, a merchant cash advance can be a way to acquire the cash to do it.
Unlike a loan, you don’t need to have collateral to back the loan. You don’t have to worry too much about your credit score either. And while the lender will pull your credit score, MCAs tend to be more lenient to companies with mediocre or bad credit.
A lender may also offer you more flexible payment options. If you are going through a downturn in sales, you can also readjust the daily hold on your transactions.
Since a factor is added to the refund amount of a Merchant Cash Advance, if you are in a period of declining sales, the higher refund amount could do more harm than good. The additional cost of reimbursing the merchant’s cash advance could deprive him of the necessary profits.
Since MCAs are unregulated, the factor on top of the repayment account tends to be higher than the interest on a traditional bank loan. This can create problems for your business later if the amount you owe is more than you can afford to pay. The repayment period will generally be shorter than a loan.
Who is the MCA for?
A merchant cash advance is ideal for a small business that needs extra money to make their business more competitive and generally more functional. Not all small businesses can get bank loans to do everything they want to do.
An MCA is not ideal for a company that has suffered a major disaster that has completely halted its business operations. Seeking help in the form of a traditional bank loan or grant will be preferable to an MCA as they do not expect you to continue day to day transactions in order to repay them.
The MCA is a good idea for a small business that is starting up and wants to upgrade non-disruptively. But if you’re looking for another way to fund, we recommend checking out our guide to the best merchant account services on the market.
Frequently Asked Questions (FAQ)
What is a merchant cash advance used for?
A business can use its cash advance as it sees fit. It’s important for the business to have a plan for their MCA and use it quickly so they can start earning money to repay the lender.
Are merchant cash advances bad?
Like most money loans, the usefulness of MCAs depends on how you use them. It’s important to understand how much you need and how much you’ll have to repay so you don’t lose money or end up paying too much.
What happens if you don’t pay a merchant cash advance?
Since an MCA is a contract between you and the lender, failure to meet the terms could result in legal action. Instead of missing payments, try to proactively communicate about what might be preventing full payments and see if you can renegotiate payment amounts and timing.
Are merchant cash advances legal?
Yes. Although these are not loans, they are considered purchases of your future sales.