If you own a small business, you must have encountered financial deficiency at some point. Traditional loans, like bank loans, are not always feasible because of stringent credit requirements or lengthy approval processes. In such bleak moments, merchant cash advances can rescue you and your business operations. What is this? Let’s understand it first.
A Merchant Cash Advance (MCA) is a short-term financing designed to provide businesses with cash in exchange for a portion of their future credit card sales. Unlike traditional loans, MCAs aren’t based on your credit score but instead on your business’s daily credit card sales. In short, you are giving your future sales to your lender for a short time to secure your finances.
How Does Merchant Cash Advance Work?
An MCA loans forwards payment to your business against future credit or debit card sales. It typically increases business working capital and covers cash flow gaps. The advance works like this:
- Your business receives the cash. You and the merchant cash advance company agree on the amount your business needs, and the funds are dropped into your business bank account.
- The financing company charges fees. Instead of an interest rate, merchant cash advance funding companies typically charge a factor rate multiplied by the entire loan amount. This interest rate means a holdback percentage. It falls between 10% and 20% and is usually fixed until the loan is completely repaid.
- Your business repays based on future sales. Repayments of merchant cash advance loans are often daily, though some MCAs offer weekly payments. The advance is refunded once you pay the borrowed amount, the factor rate, and other fees.
Pros and Cons of MCAs
There are many pros and cons to consider when it comes to Merchant Cash Advances (MCAs). A few of them are as follows:
Pros
- MCAs have approval rates as high as 90 percent. They are pretty accessible business financing for bad credit borrowers. MCAs and similar funding may take companies with credit scores in the 500s.
- Most MCAs are offered through online lending companies, which often fund within 24 to 48 hours. You can apply through a streamlined online application. You must choose the most suitable company considering their terms and conditions resonating with your needs.
- MCAs often use future revenue to guarantee repayment. The lending company won’t require you to back the advance with cash or other business collateral.
Cons
- You can make daily or weekly repayments. This aggressive repayment schedule will be effective until the advance payment is fully repaid.
- Factor rate fees often cost more than traditional loans. The fee is paid on, so an MCA can charge interest up to 50% to 100% of the amount.
- MCAs do not report payments to credit agencies, so you cannot improve your credit ratings through this financing option.
- MCAs aren’t technically business loans, so they’re not required to adhere to the maximum interest rates set by each state’s usury laws.
Difference Between MCAs and a Small Business Loan
The major difference between MCAs and small business loans is their flexibility. MCAs are based on future sales, so you do not have to worry about their instant repayment. You just need to pay a portion of your future credit sales to the lender. MCAs will help you sustain in the competitive market and use funds to broaden your business in multiple directions.
On the other hand, term loans are based on a lump sum amount you have to repay over a certain period. They have different percentages of interest and are due every month. This loan can add to your payables and provide a debt burden you must pay with your business operations.
There are various types of Business Finance Solutions available for small businesses. These include MCA, lines of credit, term business loans, and others. Of these, MCA can be a better option as it is not technically a loan but a kind of partnership in future sales for a short period of time.
What Industries Are MCAs Suitable For?
MCAs and similar loans are ideal for small businesses and enterprises. In particular, they are excellent for the following industries:
Retail
MCAs are ideal for retail businesses that experience fluctuating sales, such as seasonal highs and lows. Payments can adjust based on sales, making MCAs a flexible funding solution, especially during slow periods or when starting a new retail store.
Restaurants
The restaurant industry benefits from MCAs by gaining access to flexible working capital. This is specifically useful when facing unexpected expenses like equipment failures, allowing restaurants to address urgent needs without disrupting cash flow.
Medical Services
MCAs can also benefit the medical industry, which often requires costly equipment that is essential for operations. These advances provide a quick and flexible solution for covering expensive, necessary purchases, ensuring uninterrupted service delivery.
A merchant cash advance is a perfect option if you need cash instantly and can’t secure other forms of credit. However, it’s critical to ensure that the MCA costs make financial sense for your business. Because they’re typically easy to obtain, they come with a premium cost and can cause cash flow problems down the road. You must make a decision by carefully considering all the facts.
If you are considering MCA for your small business, you must be looking for a suitable company to take a loan. Purple Tree Funding understands all the anxiety surrounding loans and their constraints. We offer loans on collaterals with the most simplified process, almost no terms and conditions, and lower interest rates. So what is better than getting a loan in 48 hours rather than lengthy paperwork? Get in touch with us and start your dream business now!
