A merchant cash advance is not for everyone. But for many businesses, it is what enables them to reach their business goals.
The economy has been running strong, and the loan approval rate for small business loans has been running at post-recession highs, 28.1% in fact, according to the Biz2Credit Small Business Lending Index. Despite healthy economic conditions, a loan may not be the best option for many businesses, especially those with challenged credit. For some, a merchant cash advance may be the best solution. But, just what is a merchant cash advance, and how do you prepare to apply for one?
A merchant cash advance is an advance provided to a merchant as a lump sum payment in exchange for future credit card sales. However, it can’t be considered a loan because it does not satisfy the technical details of a bank account, such as a fixed payment term and collateral. A merchant cash advance is more along the lines of factoring, whereby a lender provides an advance of cash against an invoice. This distinction is essential because an MCA does not have the application requirements that a typical loan would have.
In factoring, the entity providing the funding is buying a portion of a company’s future receivables.
In a merchant cash advance, the funding recipient’s receivables are in the form of debit and credit card sales. This is riskier for the entity providing the funding because the invoice on which the cash advance exists does not yet exist. As a result, the borrowing costs are higher because of the higher risk profile of the cash advance.
What are the advantages of a merchant cash advance?
Despite the higher cost to borrow funds associated with an MCA, it still offers some advantages over traditional small business loans. Some of these advantages include:
Access to capital despite lousy credit
Unlike a small business loan, your approval is not dependent upon your credit score when you apply for a merchant cash advance. As a result, you don’t need to have good credit to be approved.
A quick decision
Once your merchant cash advance is completed and submitted, a decision is rendered in most cases within 24 hours, but occasionally up to 48 hours.
Quick funding
Funding your MCA also happens quickly, most likely within 24 hours but occasionally up to 48 hours.
What are the components making up an MCA?
When you are looking to apply for a merchant cash advance, what are some things to be aware of?
Factor fee
With a merchant cash advance, a factoring fee replaces the interest rate of a loan. It is essentially the same thing. How much you will pay for a merchant cash advance is calculated by multiplying the factoring fee by the advance amount.
Advance amount
The total amount you will be advanced is the advance amount, and the term is how long you will have to pay it back. Typical cash advance amounts range from $2,500 to $250,000, while the standard term is 3-18 months.
Holdback
Every day, a percentage of the daily credit card sales will be deducted from your bank account and sent to the MCA provider. This percentage amount is typically between 10 and 20% and will be charged until the MCA is repaid.
What are some disadvantages associated with a merchant cash advance?
While merchant cash advances are very convenient when you need cash for your business quickly and have bad or no access to credit, they come at a cost. Their cost can be high.
Secondly, they can impact your cash flow. While a 10 to 20% holdback may not sound like much, it could be a lot if your cash flow is already strained.
Preparing for a merchant cash advance?
Despite the potentially higher cost, you have determined that a merchant cash advance is perfect for your business. What can you do to prepare to apply for a merchant cash advance? The following is recommended:
- Don’t run negative balances:
Balances are a red flag to anyone providing you with funding, including most merchant cash advance funders.
- Keep a healthy daily balance:
This is a sign to the MCA funder than you are capable of repaying your advance.
- Solid credit score, if possible:
Your personal and business credit scores reflect the risk to the lender.
- No delinquencies:
Paying your other creditors back late does not look good.
- Use your merchant account:
Your merchant credit card processing is a way to get affordable financing.
- Provide financials:
To get the most competitive rates, you should provide your business financial documentation.
- Get a payoff letter:
To refinance your current advance, you will need to obtain a payoff letter from a current funder.
- Look for the best rates:
All merchant cash advances are expensive. Zip Capital Group offers very competitive pricing relative to other MCA funders.
Ready to get started?
Contact us or call today at (800) 795-3919 A Zip Capital Group small business expert is standing by.
