It has been found that more than 80 percent of small businesses rely on external funding to finance major projects. This is because a good number of small businesses are often unable to generate the funds needed for business activities from within the business. This is precisely why there have emerged a vast variety of lenders as the years churn out. And for the most part, small businesses have had to rely on commercial banks for business finance—until now.
The situation at present is quite different from what is used to be just a few years ago. The emergence of merchant cash advance vendors providing small businesses with MCA funding has had a tremendous impact on the lending industry in general. The term MCA is an acronym for merchant cash advance, a form of lending which is structured as a sale.
Merchant cash advance providers, to say the least, have enjoyed remarkable success with small businesses ever since they began operations. For just a few years ago, there were a little over hundred merchant vendors offering MCA funding in the country. Measuring it now, there are over one thousand merchant loan providers, spread across every part of the country. The situation is such that merchant cash advance has been regarded as somewhat of disruptive innovation in business.
Because of the rise of merchant advance companies, traditional lenders such as commercial banks have coerced to review what they had on the table for business owners, trying to make it more appealing. It has become quite clear to commercial banks that they might now have to up their services to compete with merchant cash advance providers. One way some banks have responded is to launch their online lending platforms seeking to mimic MCA funding.
Others have opted to partner with leading merchant cash advance providers as investors and collaborators. The success of the pioneer merchant cash dance providers in the country has also encouraged credit card processors whose primary function was to facilitate merchant cash advance transactions between the merchant and the merchant advance companies, by way of making payments to the vendors possible, to embark on MCA funding. A notable example of this is PayPal which has recently joined the alternative lending industry on account of gains made by industry leaders. There are lots of other examples; but, for now, we shall focus on understanding what a merchant cash advance is.
So, what do we say is a merchant cash advance?
A merchant cash advance is a lump sum of cash that is issued to a business based on some projection of its future debit and credit card sales. This means that in MCA funding the merchant in need of finance agrees to offer the merchant cash advance provider a stake in its future receivables. Usually, the amount that is offered to the merchant is recouped using daily deductions from the sales of the business. The amount that is deducted is, of course, not arbitrary; rather a fixed percentage of the daily sales of the business is what is deducted—this is typically something that both parties have agreed to in the first place.
Unlike a commercial bank loan, MCA funding does not attract interest payments. But, because the amount that is issued to the business is expected to worth more at some time in the future when the business is expected to pay back, merchant cash advance providers buy the future receivables of the business at a discounted price. The effect of this, in reality, is that the merchant cash advance provider is entitled to future receivables that are more than the amount that was issued.
In most cases, the merchant offers future receivables equaling 1.2 to 1.5 times the cash advance as the case may be. Also, MCA funding is not something like a loan which has to be repaid after a fixed period. There is no set period of payment, and a business cannot be penalized for late payments nor is it rewarded for supposedly early payments. In short, there is no obligation on the merchant to repay the advance. This is because the merchant cash advance is tied to the future credit card sales of the business.
Are all businesses eligible for a merchant cash advance if so?
In spite of the fact that merchant cash advance is a much more accessible lending source than, say, commercial banks, it is not open to all forms of businesses. The businesses that would typically qualify for an advance are those accept credit card payments while meeting other criteria.
For example, to be eligible for MCA funding, a business has to be generating a significant amount of monthly revenue. Most vendors will insist on a minimum of 5k dollars, while others might accept less. In addition to the above, a business has to have a credit score of at least 500, have a physical location since virtual businesses are excluded, and must have been in operations for a minimum period of 6 months. As long as the business meets all of the requirements of an individual merchant lender, it can rest assured of obtaining the advance.
It is has come as a surprise to many how merchant cash advance providers have “captured” the interest of small businesses. But a closer examination will often reveal the reasons for this. One reason why MCA funding has become so popular is that it takes care of all of the problem s associated with borrowing from conventional sources. With merchant cash advance no more waiting weeks or months before getting funds; no more having to worry about having a good credit score; no more thinking about proved collateral; no more rigorous documentation; and no more uncertainty as to whether a request will be approved. Considering all of these, it is clear why small businesses, in particular, have become endeared to merchant cash advance.