Do you own a business and find that it can be hard to make ends meet sometimes? If so, you may have been looking for a loan to help your business stay afloat during hard times.
However, depending on the creditworthiness of your business and other factors, you may be seeking alternative options to traditional loans. Luckily, there is something called a Merchant Cash Advance (or, MCA for short), which can be used to bridge the financial gap.
In this article, we’ll take a look at what a merchant cash advance is, how it differs from a traditional loan, and what business owners should look for in a merchant cash advance.
What is a Merchant Cash Advance (MCA)?
Merchant cash advance is basically a style of small business lending. It is typically a short term unsecured advance that is payed back on a daily or weekly basis to the lender, based on advances from revenue that the business generates. The underwriting process is very quick and the amount of the approval is based on the business’ income and receivables. The lender looks at overall business revenue to determine if your business has the ability pay back the advance in a timely manner.
Because there is more uncertainty and risk on the part of the lender, factor rates on an MCA can be higher than other financing options. Therefore, it is important to understand the terms you’re being offered so you can make an informed decision about whether or not an MCA makes sense to meet your needs.
Why is a Merchant Cash Advance different than a traditional loan?
After the credit crisis of 2007 –2008, when traditional banks took major losses in the business lending division, the new style of lending based off what a business actually earned from its daily operations took off. Business owners found themselves in a difficult place, where they were not able to borrow money from banks because of the new laws in place meant to prevent subprime lending and mitigate risk to the market overall. Then, in 2010, the U.S. Government came out with the Dodd-Frank Act, which made the lending situation even harder for business owners. Even with recent changes to the Dodd-Frank Act to make lending easier in today’s economy, MCAs are still a decent option for cash-strapped businesses.
What makes an MCA different than a traditional loan is that with an MCA, the lender is purchasing future receipts or receivables. This is in sharp contrast to traditional loans, which require favorable credit scores and a period of time to have your loan approved. Considering MCAs aren’t credit-score driven and funding can take place in less than 48 hours in most cases, MCAs are the perfect choice for businesses that may not have time on their side but have a stable business model based on business volume and revenue.
It is important to understand that MCAs may be paid back either by an ACH payment plan or a credit card split. A credit card split is when the advance is paid back with a percentage of the daily credit card sales of the business. The holdback percentage (typically between 10% and 20%) is usally fixed until the advance is completely repaid.
Because repayment of an MCA is based upon the percentage of the daily balance in the merchant’s account and business revenue, payback options can be either ACH payments, either daily or weekly, through the business’ bank account or a percentage of credit card sales. Repayments through a percentage of credit card sales are known as a credit card split. Repayments usually fall within 10 – 15% of the total batch. Depending on your business model (i.e. restaurant, contractor, florist, farmer’s market vendor, etc.), the lender and the business owner will discuss which method works best for both parties. If, for example, you own a restaurant who’s revenue is mainly generated through credit card sales, then an MCA on a credit card split is probably the best option. On the other hand, a contractor may not ordinarily take credit cards, which therefore makes ACH payment would be their payback method.
Of course, for businesses that regularly use credit transactions, the more credit card transactions a business does daily, the faster they’re able to repay the advance. Similarly, if credit card transactions are lower on any given day than expected, the draw from the merchant account will be less—which makes it a flexible option for businesses that experience off-days. As an example, you may own a small business that needs to retain its employees and keep them paid to keep your business operation, but an unexpected water leak caused damage and you need cash to hire plumbers. With an MCA, you use the cash to make the necessary repairs to keep your business open and pay back the MCA from the credit card sales you make.
What to look for in a Merchant Cash Advance
Merchant Cash Advance loans can vary in cost and term, so it helps to do your due diligence beforehand to realize what you’re getting into, especially the terms & conditions. You’ll also want to look at the factor rate, which is a rate that isn’t amortized over the course of the advance. Because the qualifying criteria of MCAs are much less stringent and are an unsecured capital source compared to traditional small business lenders, an MCA comes with a premium cost—but it may be a valid option for business owners who use this option to gain capital when in a pinch. Remember, this means in case you fall under default of your payments, the organization will not be able to affect your personal assets such as your home the way a traditional loan organization would.
Also, it should be noted that because a merchant cash advance isn’t a loan and therefore MCA providers don’t report your payment history to the major credit bureaus, MCAs don’t help build, strengthen, or damage a business credit profile.
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Now that you’re up to speed on what a merchant cash advance is and how it can help your business reach the next level, you’ll want to find a qualified lender that offers the best terms for your next MCA. This is where a company like Evolution Capital can be helpful in facilitating the proper MCA to qualified merchants.
As a company with many partnerships and relationships with lenders for nearly every industry, Evolution Capital takes the time to understand your business and work with the principle operators in finding the best funding solution. At Evolution Capital, our ultimate goal is to fill the immediate need for working capital and look to find better, cost-effective options going forward. While the process may take time and effort, our team is dedicated to help our merchants achieve their funding goals. Visit Evolution Capital’s website to see if your small business qualifies today.
