Published December 10th, 2015
If you’re a business owner who has come into a situation where you need cash fast to cover business related expenses, a merchant cash advance (MCA) may be an option to consider. However, you will need to make sure that you find the right company you can trust, and understand all of the details before making your final decision.
Whether you have recently found an opportunity to grow or improve your company or you are dealing with a disaster of epic proportions—you need to find a solution to your cash flow issue. If you have tried to get a small business loan with no luck because of bad credit, a merchant cash advance could solve this issue as well.
How does a merchant cash advance work?
With a merchant cash advance option, your business will receive a lump sum of cash. Because you won’t face all the paperwork you would with a traditional business loan, you can expect faster payment—potentially in within a week, or even just a few days. This quick turnaround time is a huge benefit for the time-sensitive cash flow issue that businesses face.
To repay the cash advance for the lump sum, you’ll exchange a portion of your future sales. Many businesses that primarily process credit card payments get the most benefit out of this situation—especially if the business has little collateral or bad credit to start with.
It’s important to remember that a merchant cash advance
is not a loan. It is an agreement you make in direct connection to your future sales. In other words, as opposed to having to send a fixed payment each month, the provider will collect a preset amount directly from your daily credit card sales. Your merchant cash advance company will take funds from your daily credit card sales until the amount is paid in full.
Repayment Options with a Merchant Cash Advance
If you find yourself needing to find a solution to your financial pinch, you’ll need to shop around and make sure you understand what the terms of repayment are. The average repayment for a merchant cash advance is typically around 8 months. However, they really can vary widely with repayment times ranging from half or double the average of 8 months.
You should be able to find a company who can work terms that you are comfortable with, but make sure you understand what fees you may be charged to take advantage of the cash advance. There is a large difference in the final cost depending on what merchant provider you choose, and of course, there are predatory companies who jack the price up. You will need to make sure that you look at the ratings and do some background checking before you sign on the line and take the cash.
Let’s take a closer look at the pros and cons of a going this route so that you have all of the information you need and can make an informed decision...
The PROS of an MCA
Your personal assets are not used as collateral
– A merchant cash advance is an unsecured loan, which means that
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you won’t have to put your home or business assets up as collateral. The good news here is that you won’t risk losing them in the event you fall on hard times and can’t pay it back right away as quickly as you first anticipated.
Typically, businesses who don’t qualify for a bank loan because of the collateral requirements will nonetheless be able to acquire an MCA if they have a solid stream of credit card sales.
You will get access to needed cash fast
– This is one of the biggest reasons many business owners choose to go with an MCA. Sometimes you just need cash fast. Whether there is a disaster at the shop, or you need to fund a golden investment opportunity that just came your way, there isn’t always time to wait weeks for the paperwork to go through at the bank. With a merchant cash advance, you won’t have a load of heavy contracts to wade through. What an MCA company does is verifies your past incoming credit card receipts to determine if you can repay based on your history of sales. You’ll also typically need to supply statements from your financial institution as well to form a large picture of the health of the business.
Repayment is based on sales
– As mentioned earlier, a MCA isn’t a traditional loan, so there won’t be monthly payments. Your repayment schedule is figured only as a fixed percentage of your daily sales. Whether your business takes a dip in business or starts to boost profits, your payments continue to ebb and flow as a fixed percentage as opposed to a fixed dollar figure.
The Cons of an MCA – What to Watch Out For
The annual percentage rate is high
– Getting fast cash with zero collateral doesn’t come without a cost. Merchant cash advances have higher APR rates than traditional loans. Yes, the percentage of what you pay stays the same, but what you pay over time will be more based on paying higher long-term APR fees.
No benefit to early repayment
– Another quirk of the MCA agreement is that the terms are fixed and you can’t pay it back faster. There’s no benefit to repaying the amount early because you’re required to pay a fixed amount of fees regardless.
Know the Basics of an MCA
Below are some terms and a description of what you can expect if you decide to go with a merchant cash advance.
– The factor rate will be set by your merchant cash advance company and will be multiplied by how much you’ll need to repay. For example, if you needed to borrow $20,000 with a factor rate of 1.3, you’ll have to pay a total of $26,000.
– The retrieval rate is what you’ll pay back in addition to the original amount borrowed. Instead of paying a fixed dollar amount as a monthly payment, you’ll pay a fixed percentage on all future credit or debit card sales.
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Tips When You Need a Merchant Cash Advance
If you decide that a merchant cash advance is the best option for your business, make sure that you contact more than one company to find the best deal. Make it clear when you get in touch that you’re calling around to get more information and compare retrieval rates.
Keep in mind that these companies are looking to “close the deal” so if they understand you’re looking around, you may have a better chance of finding a deal.
When you’re discussing the cost of your MCA, focus more of your efforts into getting the retrieval rate lowered as opposed to the factor rate, as that will have much more impact on the overall cost you’ll need to pay back. If you can get a lowered amount for the retrieval rate, you’ll lowering the amount you’ll need to pay each month but of course, extending the overall time it will take to pay it back in full.
Bad Credit? You’re Not Alone
According to the US Small Business Association, a recent report showed that the majority of business owners, over 63%, attempted to fund their financial needs through a bank but less than half were able to secure the business loan.
The Small Business Association goes on to explain that these low approval rates are in part due to bad credit that resulted from the financial crises several years ago. But even when businesses do have good credit ratings, it can be hard to secure a business for the smaller business.
When you need access to cash, the most frustrating thing is being dinged for roadblocks that were dodged years ago during the financial crisis—you’ve still remained successful on a daily basis, yet you can’t secure that traditional loan because of the overall tentative response banks now have in regards to loaning money out to small businesses.
These cash flow and funding challenges are why the merchant cash advance offers a clear solution to the funding dilemma for more businesses. When you need cash to make repairs or cover sudden changes in inventory needs, or a myriad of other reasons, sometimes it just makes the best sense to go with the solution that offers a fast way to get the needed funding.
What you will need to keep in mind, however, is that the retrieval rate charged by a merchant cash advance company could vary widely, and you’ll need to keep on guard and do your homework to prevent entering an agreement with a predatory lender.
A good tip to always follow to ensure that you’re dealing with a reputable company is to always check their rating score and read the fine print before choosing a company. There are many companies to choose from, so you have a great chance of finding a company that will work out the best for your immediate cash flow needs.
Sources for further review:
Fits Small Business: http://fitsmallbusiness.com/merchant-cash-advance/
US Small Business Association: https://www.sba.gov/blogs/bad-credit-stopping-you-getting-business-loans
Nerd Wallet: http://www.nerdwallet.com/blog/small-business/merchant-cash-advance-small-business/