Over the course of your career, have you ever asked for an advance on your payment or salary? If you, then you should be familiar with the concept of a cash advance. It is basically asking for some money ahead of time so as to meet some financial needs as they arise. Though there is no specific cash advance definition to call upon, the concept itself is well-known and easily understood.
Now, what if instead of an individual asking for an advance, it is a company asking for the advance? This is exactly what a business cash advance is, and in this article we will be taking a look at what they are, how they work, and what the pros and cons of using them as a means of financial aid are. Let’s get started!
What Is a Business Cash Advance?
The first question that comes our way is what is an MCA? It stands for merchant cash advance, which is another way of saying business cash advance. This is a kind of financing that can be availed by businesses that get quite a high amount of credit card sales. As a general rule, this includes retail stores, medical supply stores, and restaurants, among others.
To put it simply, these businesses are given a lump sum of money to meet their needs, usually from a lender, and then they pay it back as they make more sales. We will be learning more about how merchant cash advance loans work in the following section, but this is the gist of the matter.
How Does This Work?
The process of getting a merchant loan is fairly straightforward. You need to make an application to merchant lenders of your choice for the loan and present proper documents. These can include, but are not limited to:
- Your state-issued ID
- Bank statements
- Credit scores
- Tax returns of your business
Depending on the lender, they will either ask for more documents or less, and you should keep it all handy. Your credit score is especially important. Lenders will most times do a background check on all applicants for a merchant cash advance, and you should know what they are going to find. It helps you stay prepared.
Once your application is approved, you will receive your merchant advance within a few business days. The amount ranges from a few hundred to more than a few hundred thousand, depending on your needs, but the window for paying back the sum is usually very short. Generally, you have up to eighteen months—less, in most cases.
Paying Back a Merchant Loan
Unlike a typical loan, merchant cash advances do not function on interest rates. Instead, they use a factor rate. This might sound troublesome and complicated, but it really isn’t. These factor rates generally have a range of 1.2 to 1.4. Usually, money is deducted from the sales you make every day according to this rate. It can be directly from your account if that is how you’d like it.
Let us take an example. Suppose your total merchant finances came up to about 20,000 USD. with a factor rate of 1.2, you stand to pay back 24,000 USD. The cost of this loan would be 4,800 USD.
The reason behind the money being deducted daily from your account is that because these loans are short-term, an annual premium rate would cost an arm and a leg to pay back. The use of fraction rates is what makes this kind of financing tenable and attractive.
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Pros and Cons of MCAs
Just like everything else under the sun, MCAs aren’t without their own positives and negatives. In this section, we will tell you what exactly these are! First, we will take a look at the positives.
Pros
- Flexible Payments: There is a lot of flexibility with MCAs. as with any loan, you are free to do with the money as you please. However, where it really comes into its own is the repayment. If the repayment is made on a percentage basis of daily sales, that means that you don’t have to pay a fixed rate every day; on days where you sell less, the amount you pay will be low as well. This is especially nice for businesses without steady sales.
- No Collateral: You do not have to put up any collateral to avail MCAs, as they are unsecured. If you don’t have many assets, then this will be a major blessing.
- Easy Application: The application process isn’t complicated. In fact, if you can show that you have a good track record for making credit or debit card sales, you will usually get accepted and paid within two or three business days.
Cons
- Higher Costs: MCAs typically require you to pay more than any other form of financing or loan. The shift to factor rates can be confusing for most, and paying off the debt when you have money does not work, unlike credit card debt.
- Potential Debt: Because money is siphoned off your sales every day, you lose out on a margin of profits. Continued for months, this might affect how much money you actually make and push you into lending more. Be wary of this before you go for an MCA.
Get Merchant Financing
Merchant financing is a very valid and, quite honestly, necessary requirement for the survival of small businesses. It is very difficult to keep one going, no matter the niche, because invariably, everyone runs up against the industry giant. And competition with such a huge entity is untenable.
Instead, use your loan to create your niche and expand into it. If you have a loyal customer base, then you can hardly hope for anything better. MCAs are a good way of achieving your needs, but be sure to read up on all of your options and consequences before you subscribe to anything. For more information on your business capital options, reach out to PIRS Capital.
I work with companies that sell products on platforms such as Amazon, Shopify, Walmart, Ebay, Etsy, etc. I understand that every business is unique and thats why I form genuine relationships with owners so I can help them reach their goals and find success through our working capital solutions.
