As a start-up company I’m sure someone has mentioned, “why don’t you get a merchant cash advance?” In this article, you will learn what a merchant cash advance is and what are the pros and cons of obtaining a merchant cash advance. So let’s start with, how do merchant cash advances (mca) work?
A merchant cash advance gives you an upfront cash advance in exchange for a percentage of your future sales. what this means is instead of making one fixed payment with interest every month from a bank account over a specific period of time, with a merchant cash advance you will make daily or even weekly payments, in addition to extra fees until the advance is paid in full.
After doing some research & reading some of the reviews from other small business owners who have used an MCA had a lot of positive feedback. One of the benefits of why they recommended an MCA was how fast they received the capital as opposed to any other loan type product. The approval process is so fast that you can be approved with 24 hours and funds in your account the same week, depending on the lender. Another great benefit is that they’re underwritten based on your business bank statements, not your fico score. Now having late payments on a prior loan or bankruptcy may count against you, but with a credit score as low as 550 can get you through the door, or some lenders even will do 500.
Now considering all the benefits of an MCA loan, calculating the cost of committing to this type of loan may or may not be beneficial depending on your industry. For example, let’s use a factor rate of about 1.2 for a $100,000 advance, you will need approximately 360 days for repayment if you expect $50,000 in monthly debit card sales & and withholding of 20%. With these figures, you’re looking at a daily payment of around $333, & the effective APR will be about 38.06%. Not all lenders work the same so I suggest shopping around until you find the most competitive rate, usually direct funders have the best rates in the industry.
When finding out if you qualify for an MCA consists mainly of your business meeting a few minimum requirements, these requirements include:
•The business must have an operating history that includes accepting & processing payments through the business bank account.
•A minimum monthly sales volume
•A minimum annual revenue
After doing some research depending on the lender, some may not strictly follow these criteria. Most lenders assess the application on a case by case basis & look at the overall financial picture. Let’s say you haven’t been in business that long but you have a strong personal credit score, it can definitely work in your favor.
When considering an MCA as an option for financing it can help you cover short-term expenses or invest in a project to grow your business. As stated above a merchant cash advance, or MCA is a loan type product used for short-term financing & designed to deliver cash to small businesses quickly. An MCA is often easy to access, but it doesn’t work the same as a traditional business loan.