Merchant Cash Advance
Merchant or business cash advances are not a formal type of loan. Rather lenders offer advance cash in a lump-sum amount to your merchant account. Lenders offer these advances against expected sales or revenue streams. Businesses with regular daily cash inflows like retailers, restaurants, and private health clinics, etc. find this option feasible.
How Merchant Cash Advance Works:
Merchant cash advances work for businesses processing credit card payments. Lenders require daily cash flow statements and business credit score to analyze the creditworthiness of the borrower. The approved amount is offered in advance as a lump-sum amount. The repayment terms are usually set as a percentage of daily sales. Merchant cash advance programs do not require any collateral, however, may need a personal guarantee in some cases.
Qualification, Interest Costs, and Repayment Terms:
Merchant cash advance programs do not work as formal loans. Lenders usually require a credit score and sales reports to assess the loan approval criteria. A strong credit score desirably can secure easier MCA terms. Lenders consider an average personal credit score of 680 and above passable to qualify for an MCA.
Interest costs are usually determined as factoring ratio. A factor is preset against the total borrowed amount. It can range anywhere from 1.1 to 3.0, or higher. For example, a loan of $ 50,000 with a factor of 1.3 would repay $65,000. These factor rates make the MCA loans fairly expensive as compared with other business loans.
Repayment terms include setting a maturity deadline. Maximum maturity dates are set as a few months up to 18 or 36 months. Percentage or fixed daily payment is set to be deducted from cash receipts. Lenders usually set a holdback amount as a percentage of total daily revenue. For example, if daily sales are $7,000 with a 20% holdback, the borrower can use only $5,600 less the repayment installment.
Merchant Cash Advance Benefits:
MCA loans are a good choice for businesses with regular cash flow. Businesses without any tangible assets or collateral can secure cash advance without any pledge. Loan processing with MCA is fairly faster as most lenders are specialized private institutes. Unlike business loans, there are no debt covenants on the utilization of funds. Both parties can agree upon flexible repayment terms. Often borrowers look for roll-over facilities resembling a credit revolving bank financing.
Merchant Cash Advance Limitations:
High-Interest costs are the biggest disadvantage of an MCA contract. Converted to financing APRs, these factoring costs may reveal a rate of 100% and above too. MCA often restricts daily cash flows digging the hole deeper. Businesses may find it hard to completely eliminate the MCA loans and often need to refinance with the same lenders. Other Business loans help build a credit history, MCA loans do not contribute to the credit history.
Is the Merchant Cash Advance Program the right choice?
Many businesses often consider MCA as an alternative funding option. It does not contribute to your business credit history, but it doesn’t require any pledge too. If you require quick cash access for a short time, MCA can be a viable option. For long-term financing, the MCA higher factor rates may considerably pose liquidity risk for your business. Many lenders put high hold-back ratios that further deplete your daily cash reserves.