How does a Merchant Cash Advance (MCA) work?

Obtaining an MCA is expeditious as it involves a straightforward procedure. However, the sum of money that you qualify for hinges on the extent of your everyday credit card transactions.

In just a matter of days, a sum of money ranging from a couple of thousand dollars to more than $200,000 could come your way. But, the repayment period for these funds is usually brief, frequently less than 18 months.

The factor rate for your small business funding relies on how much you receive and can vary between 1.1 to 1.5. The financial capacity of your enterprise is the key determinant of your factor rate. A superior credit standing equals a reduced factor rate.

Suppose you obtain an MCA amounting to $100,000 with a factor rate of 1.2. As a result, your total debt will be $120,000.

The funds owed will be deducted from your daily credit card transactions by your lender until they have been repaid. The holdback rate, which typically falls within a range of 10% to 20%, is the percentage of each transaction that will be withheld for this purpose.

The majority of lenders will deduct the funds owed from your account without requiring any action from you. The repayment plan is structured around a set proportion of your daily sales, meaning there won’t be any financial stress if your business experiences a sudden decline in sales.

What are the requirements to acquire a merchant cash advance?

Getting approved for an MCA is a breeze as there is no need for extensive business experience, unlike when applying for a small business loan. Even if you have a less than stellar credit record, you can still be considered eligible in most cases.

For small business owners with poor credit, demonstrating six months of credit card transactions is necessary. A positive sales record can enhance the chances of getting approved.

Conventional banks do not usually provide MCAs, which means finding an alternate lender is necessary. Lending marketplaces prove to be a valuable source for individuals as they can submit a single application and receive various offers from multiple lenders.

After selecting a lender, you will be required to supply the following details while completing your application:

• Proof of identity
• Contact information
• The amount you want to borrow
• Company information
• Bank and credit card processing statements
• Business tax returns

Pros of MCA Funding

• The approval process for MCAs is speedy and the application is straightforward. MCA loans require minimal paperwork, unlike small business loans, and the funds could be in your account in a matter of days.
• Small business loans may not always be a feasible option for companies lacking credit history or business experience. In such cases, Merchant Cash Advances (MCAs) can serve as a viable solution. To qualify for an MCA, businesses must demonstrate a high volume of credit card transactions.
• MCA funds offer a vast range of utility. With no stipulated spending obligations of any sort, they allow you to unleash your imagination in deciphering the best usage for the money obtained through them.
• No need for collateral is necessary as they only require a commitment regarding a certain percentage of your future credit card payments, rendering collateral requirements unnecessary.

Cons of MCA Funding

• Merchant cash advances come at a considerable cost, with exorbitant fees, which go up if you get a high rate factor. Even with a low rate factor, you could still be slammed with an APR of up to 35%.
• MCA’s lack federal regulation and instead are subject to state-guided Uniform Commercial Code. This lack of federal regulation renders them exempt from consumer protection laws including Truth in Lending Act, thus making them intricate and incomprehensible to a considerable number of entrepreneurs.
• Your lender won’t assist in establishing your business credit, as they do not report prompt payments to credit bureaus. MCA can’t create business credit but cannot cause harm to it either.
• An MCA may bring temporary financial relief, but it can eventually aggravate cash flow issues. The compulsory daily payments can become a liability, leading to perpetual debt and hindering your business’s growth.