A Merchant Cash Advance (MCA), or Business Cash Advance, is a type of loan that provides money quickly and efficiently to start-ups and companies. The MCA offers business financing options. Regular recompenses are paid every working day and payment terms typically 24 months. The MCA is opposed to the traditional bank loan’s higher monthly payments and longer terms.
MCA can be used to refer to short-term business loans or future credit card sales receivables. Businesses that have stable credit card transactions, such as restaurants, pharmacies, and retail stores, can apply for this type of financing.
How does a merchant cash advance work & What is the best way to get started?
The process for obtaining a merchant cash advance can be completed quickly. First, the lender must be able to identify the business. It requires the following documentation:
- Documentation proving identity issued by the government
- Processing of bank and credit card statements
- Returns on business taxes
After the identification approval has been processed, the loan amount is available to the business in a matter days. They then receive a lump sum amount that they pay back to customers through sales generation. The borrower may offer a daily percentage of sales to the lender in return for the loan amount. You can also do it through the linked merchant account. This is calculated on sales made by debit or credit card. The daily quota does not include cash and cheque sales.
Through Automated Clearing House payments, the compensations can be taken directly from a borrower’s account. This logic allows small businesses with low credit ratings and debit sales rates to be eligible for MCA if the borrower chooses to make ACH repayments. Borrowable MCA amounts can be borrowed for as little as a few thousand dollars up to more than two hundred thousand dollars. The payback period is typically very short, regardless of how much you rent. It is usually around 18 months.
Pros and Cons of MCA:
MCA offers many benefits.
- A Simple Application Process: MCA is quick and easy to apply for. Money borrowing can be done in less than a day. You can also apply quickly because your sales history and loan credit history are less important than your loan credit history.
- Flexibility: MCA offers a variety of payment options and allows borrowers to make use of the funds however they wish. The payments are based on a percentage daily transactions. This means that debtors don’t have to repay if they have low income. This can cause cash flow problems that could lead to the company taking on more debt.
- No collateral: MCA loans can be repaid unsecured. This means that the borrowers are not obligated to provide collateral. This feature is great for businesses with small assets.
Cons of MCA:
MCA has the following disadvantages:
- Potential Cash Flow Issues: MCA requires that the borrower dedicate a certain amount of future sales to repay the borrowed amount. This can result in cash flow being issued which could lead to higher debts for the business.
- Comparatively Higher Costs: Factor rates are much more expensive than other funding options. Factor rates are not tied to a particular period. Therefore, it is not a good idea to pay off in advance.
