When you do not have enough capital for your small business and want to raise some fast, using a merchant cash advance could be a good option for you. Below, we will look at what a merchant cash advance is, how it works and what are its benefits.
A merchant cash advance, also know as credit card receivable funding, is an alternative way of raising capital for a small business. Merchant cash advances are usually an efficient, fast, and simple-to-manage method of small business funding. To be able to receive a merchant cash advance, a business should have an easy-to-predict volume of credit card sales. Different providers will give you different terms for your merchant cash advance, but it will mainly depend on your credit card sales volume stability. Usually, the provider of merchant cash advance buys a fixed amount of your future credit card receipts at a discount.
The merchant cash provider then gives you a loan of up to $160,000 after which he gets a fixed percentage of your incoming credit card sales. This continues until the cash provider receives as much as he has given. Finding a merchant cash advance provider can bring your business many benefits. It usually is a very quick funding method for your business. The whole application process usually takes no more than two weeks. With most merchant cash advance providers, you have the freedom to spend the funds from the merchant cash advance on whatever you think is best for your small business. And even though merchant cash advances could be a bit more costly compared to other funding options, they can really give your small business the momentum and create real opportunities to expand it.
When getting a merchant cash advance, there is an agreement between you (the owner of the business that receives the MCA) and the merchant cash advance provider. That agreement includes the amount you are taking, the amount that needs to be paid back and the holdback percentage. After the agreement is done, the funds are transferred into your business bank account. In exchange, the merchant cash advance provider gets a percentage of your business’s future credit card sales.
Every day, the merchant cash advance provider receives a percentage of your daily revenue (based on your agreement). This process is called a holdback, and it will go on until the cash advance is fully repaid. The access that the merchant cash provides gets to the merchant account of the business owner, excludes the collateral, usually required when taking out a traditional business loan. Since the repayment is in a form of a business’s daily revenue percentage, the more revenue your business makes, the faster you can repay your merchant cash advance. The lower your daily revenue is, the slower your merchant cash advance is going to be repaid.
Merchant cash advances have proven to be an attractive funding option for many small businesses. This is due to the fact that this funding method offers some really good benefits. Here are a few of them:
Similar to some types of credit lines or small business loans, when you request for a merchant cash advance, you have the option to go through the whole process without having to leave the comfort of your home or your business headquarters You can do so by submitting your information online. It will take no more than a few minutes to upload all the required documentation, such as your bank account statements, your business tax returns and your credit card statements.
One of merchant cash advances key features is the funding speed they offer. Merchant cash advance providers can make a decision on your application within a few hours, after which they will transfer the funds in just a few days. When you need to quickly raise a capital for your small business or deal with an emergency business expense, merchant cash advances can definitely be an excellent option.
When taking out a small business loan, having a bad credit can really damage your chances of getting one. When taking out a merchant cash advance, the situation is a bit different. Merchant cash advance providers are more interested in your ability to repay the cash advance, based on the consistency of your credit card sales, rather than your credit score history. Do not forget, however, that getting a merchant cash advance will not do much for building your credit. That is because most merchant cash advance lenders do not report to the credit bureaus.
Normally, when you apply for a business loan with a traditional loan institution like a bank, you are expected to provide some form of collateral to secure the loan you want to take. Banks see collateral as an insurance in case you fail to repay the loan you have taken. Merchant cash advances, however, are not secured and so you are not required to put down any business assets or personal belongings as collateral to secure your quick funding.
When taking out a small business loan, you usually have to pay the exact same amount of money each month, based on the amount you have taken and your loan’s interest rate. Even though in most cases, this way of scheduled repayment can be good for you, as it allows you to structure your budget by knowing exactly how to calculate your expenses, it can also make it harder for you as sometimes you may have a bad revenue month, leaving you unable to make your fixed monthly payment. What you get with a merchant cash advance is flexibility. Since the payments you make each month are based on a percentage of your credit card sales, if you have a rough month, you will repay a smaller amount.