Today, the business-financing environment is not quite favorable for businesses. Getting funding for working capital is a difficult achievement for small businesses and startups that do not have enough credit score and revenue to be approved for a funding loan. Considering the economic conditions, unless you have a perfect credit score or you are a very established business, it is nearly impossible to get yourself a loan you desire to conduct business. It is essential to obtain funding at any time to survive through any financial turmoil.
It goes without saying that business loans are not easily approved nowadays, due to which, business owners struggle to continue operating normally. This is also the primary reason why small businesses and startups fail as they do not have enough finances available to handle everything – from day to day activities to purchasing inventory. Conventional loan options, such as banks and credit unions do not offer funding loan anymore to those businesses who do not have a perfect credit score, multiple assets, and high revenues. This is how alternative lending options started to gain traction among these businesses.
A funding loan helps businesses to get through the situations when there is a financial crunch. One such option, which is typically not a loan, is a merchant cash advance or MCA. For any business owners, an extra infusion of cash is vital to efficiently conduct business. However, before proceeding to get yourself approved for MCA, it is imperative to learn what it is along with the things to consider for this type of alternative lending option.
Merchant Cash Advance Funding Loan
Financing your small business is about acquiring the right information to make a decision that is in favor of your business. Merchant cash advance is ideal for those businesses that do not qualify for conventional bank loans. In addition to this, companies and startups who have been in business for at least six months can easily get themselves an MCA, if they accept debit and credit card payments. These businesses are not eligible for a bank loan or credit union. Thus, if a business wants to get access to quick cash in form of a funding loan with little hassle, MCA is the perfect solution for them. There is little paperwork required, same day approval in most scenarios – all of this is done online. These are just a few things that make merchant cash advances a better option than other alternative lending options. So let’s discuss what is a merchant cash advance?
What is a Merchant Cash Advance?
Unlike other funding loans, as the name suggests, a merchant cash advance, is an advance. This type of finance provides businesses with the upfront sum of cash in return for your future credit sales and receipts. The reason why it is not considered as a loan is that the MCA lender purchases your future credit sales and gives you fast cash in return for it. When you decide to go for an MCA as a type of financing for your business, the lender will charge a fixed percentage that will be deducted from your debit and credit sales on a daily, weekly, and monthly basis. This agreed percentage will continue to be deducted until the amount you borrowed is paid in full in the given time period. Typically, a merchant cash advance has to be paid in full within a year or two, at max.
The percentage mentioned previously is known as a holdback percentage or a factor rate, which an MCA lender quotes to a business. A factor rate is in a decimal form unlike interest rate in case of funding loan. Usually, a factor rate is agreed within a range of 1.2 and 1.5, which is multiplied by the amount you are borrowing from the provider. This means when you are quoted a factor rate, multiply it by the amount and the number you get is the amount that you will pay in full. If you are concerned why there are different factor rates – the rate you are quoted varies from lender to lender. The MCA provider will perform a risk assessment to evaluate your situation before quoting a rate.
It is believed that if the company that will be providing MCA thinks your business would perform well enough resulting in higher credit sales, your factor rate will be less. On the other hand, if you are a riskier merchant with low sales, revenues, and credit score – you are probably ending up on the higher scale of factor rate. This helps MCA lenders to assure that they will be getting a major chunk of their funding loan in case the business defaults in the middle. In simpler words, if you are a riskier business to work with, you will be quoted a higher factor rate and vice versa. Thus, the total amount to be repaid to the MCA lender depends on how well your business performs in the market.
Things to Consider Before Applying for a Merchant Cash Advance
When you are shopping around to get a funding loan for your business, it is important that you thoroughly consider all the things that are associated with that type of financing option. Thus, in case of merchant cash advances, here are some of the things that you need to consider before agreeing to an advance from MCA lender.
When we talk about unnecessary costs, majority MCA lenders do not charge any hidden costs once your application is approved for MCA. Thus, before accepting to go into an agreement with an MCA lender, make sure to understand all the costs, fees, and anything else associated with the deal you are about to begin. Apart from this, know that you are not required to pay any interest on merchant cash advances. Therefore, compare all the offers and make an informed decision.
Credit Card Sales on a Monthly Basis
MCAs are basically based on your credit and debit card sales and receipts. Thus, the monthly sales and revenue you generate from credit card allow you to determine the lender from which you can receive the funding loan. It is believed that most lenders usually ask for most recent credit card statements to look how your business performs. Typically, the documentation is required by the MCA lender to know whether you can easily repay the amount or not once the application is accepted. Your financial statements will give them an idea of your average monthly income.
On average, MCA lenders expect businesses to at least make monthly credit card sales between $1,000 and $4,500. In case you operate a seasonal business that may not perform optimally during off-season, consider a lender that accepts a lower monthly credit card sales amount. Such providers usually ask for 12 months of credit card sales receipts for assurance.
Your Tenure in the Business
A majority of merchant cash advance lenders require businesses to be in ‘business’ for a minimum of six months or more. The given time period is enough for a normal business to generate enough revenue and credit card sales to be eligible for an MCA. While there are lenders who also approve applications who are in the businesses for a bare minimum of 60 days, but then the factor rate and other costing plays a vital role in the amount that you have to repay.
Immediate need of the money
It is known that MCA lenders do not ask for a box of documents and the process is not tedious as well. Your application is mostly approved within hours or days and the cash is transferred directly to your account within a few days or weeks. An MCA provider will only ask for necessary documentation and there will be little to no paperwork.
Depending on the lender, you might only have to submit a copy of monthly credit sales. Whereas, others may ask for bank statements, lease agreements, photo IDs, voided checks, and more. In case you need funding loan at the earliest, it is better to choose a company that processes such financing quickly.
Your monetary requirements
This is the most important thing to consider, the amount that you have to borrow from the MCA lender. Typically, companies can provide funding loan of up to $750,000, but it varies from lender to lender. Regardless, it depends on the monthly credit sales you generate.