Merchant Cash Advance
A merchant cash advance is a unique type of financing available to certain businesses operating in partnership with card processing companies. Receiving a merchant cash advance means your business is given upfront capital in return for a portion of your business’s credit card sales. This is normally done through partnerships with card processing firms — they withhold a certain portion of sales revenue for a set amount of time.
How Does a Merchant Cash Advance Work?
In the past, a merchant cash advance has been mainly used by businesses whose revenue source is heavily reliant on credit and debit card sales. Some of the businesses that fall into this category include retail establishments and restaurants. However, in recent times, merchant cash advances have been made available to businesses across a variety of different industries. A merchant cash advance lender doesn’t consider the funding they provide as a loan. Instead, a merchant cash advance lender provides an upfront cash advance in return for a portion of future credit and debit card sales. Since the source of the cash advance repayment is limited specifically to credit and debit card sales, the transaction is not considered a typical loan. This means that the transaction isn’t under the same regulations as a standard loan.
In general, there are two distinct ways that a merchant cash advance can be structured. The small business owner can obtain a large upfront cash sum in exchange for credit and debit sales. The other option available is to obtain the upfront cash advance amount in exchange for providing fixed debits on a daily or weekly basis from your checking account. This process is known as Automated Clearing House (ACH) withdrawals.
Businesses that don’t have a lot of credit card sales tend to gravitate to the ACH withdrawal repayment option when obtaining a merchant cash advance loan. Unlike with a traditional loan where a set payment is made on a monthly basis, daily or weekly payments are withdrawn from the account in addition to any applicable fees. This payment process continues until the entire merchant cash advance is paid in full.
What fees can you expect with a merchant cash advance?
The fees associated with the merchant cash advance will vary based on your specific loan terms. In general, the fees are usually tied into the business owners ability to fully repay the loan.
Merchant advance loans typically have factor rates ranging between 1.2% to 1.5%. However, the higher the level of risk, the higher the fees that you will end up paying.
The fees associated with a merchant cash advance are one of the primary reasons that many small business owners shy away from this option. MCA’s are well known to carry annual percentage rates that extend into the triple digits. Often the cost of the loan ends up costing the business owner thousands of dollars in fees in addition to the rigorous schedule of the daily repayments. Some businesses have been unable to handle the heavy repayment schedule associated with Merchant Cash Advances which leads them to seek out yet another loan. This can add to the burden of debt and make it very challenging for a business owner to turn a profit. For these reasons, it is widely advised to think carefully before taking on an MCA.
Why Do Business Owners Choose MCAs?
Although Merchant Cash Advances provide a high-fee funding option, there are advantages to using them. By investigating the benefits associated with using MCAs, you can determine whether or not they are the right option for your business needs.
Immediate funding source – Merchant Cash Advances are an immediate funding source that provides the instant access to cash that many businesses need. An MCA can normally be funded within a week’s time and has no exorbitant amount of paperwork associated with it. Instead, providers of MCA loans look into daily credit card receipts in order to decide whether or not a business owner will be able to repay the cash advance.
Unsecured Source of funding – Since MCAs are an unsecured source of funding, no collateral is needed in order to obtain the cash advance. Business owners can have more peace of mind knowing that they don’t need to give up any personal belongings if they default on the loan. In the event that sales plummet, the MCA provider has no real recourse for action. However, many MCA lenders go around this by requiring that the business owner signs a personal guarantee. This is a written agreement that ensures that the business is personally responsible for repaying the cash advance. The MCA can try to recover some of the funds using the personal guarantee in the event of a default.
Fluctuates with your sales – Since there is no fixed payment amount and the payments are based on your sales, you can rest easy when sales are down. Instead of losing a large chunk of your income during slower months the repayments will be smaller and based on just a percentage of overall sales.
Even with these benefits, MCAs are still a borrowing option that can be hard on certain types of businesses. If the income from your business is unpredictable, then this could make paying for the cash advance a financial burden.
What Makes a Merchant Cash Advance Different?
A merchant cash advance is different from any other type of small business financing you may see on the market. You are effectively selling a portion of your future card sales in exchange for access to upfront working capital. Instead of setting up a payment schedule, the lender will receive a portion of your credit card sales until the original balance is paid off. This restricts the ways that you can pay back the loan; unlike a traditional loan, you cannot pay the balance off using separate funds. Another clear distinction is the fact that these types of cash advances aren’t regulated the same way by the lending laws — for this reason, some interest rates on merchant cash advances can be well above 35%. It is important to fully understand the costs associated with a merchant cash advance prior to undertaking one.
Is a Merchant Cash Advance Right for My Business?
Due to the high-interest rates associated with a merchant cash advance, you may be asking whether it is the right fit for your business. The primary benefit of a merchant cash advance is for a business operating with poor credit. If you have a large sales volume but unestablished or poor credit, a merchant cash advance may help you receive the funding you need. So if you need access to working capital quickly, and know that your business has large volumes of regular purchases, consider a merchant cash advance when deciding how to attain additional financing for your business.
How Do I Qualify?
Although a merchant cash advance can be a good option for a business with limited credit history. There are a few requirements that most lenders have. Firstly, if your business has a recent bankruptcy on file, it will most likely not be eligible for a merchant cash advance. In addition, if your business is less than a year old, or if you don’t have credit card processing facilities, you will also most likely be disqualified from applying for a merchant cash advance.
Downsides to Choosing a Merchant Cash Advance
It is important to consider the potential drawbacks of applying for a merchant cash advance since this can play a major factor in the profitability of your business.
Higher APR – The annual percentage rate stands for the full borrowing cost that you will pay in the end. This includes the fees and interest. With MCAs, the annual percentage rate varies from 40% to 350% depending on the provider. The other factors affecting the APR include the extra fees, the length of time it takes to repay the advance in full, as well as the amount of the business’s credit card sales. Having an APR in the triple digits is much more expensive than what most traditional loans equate to. Traditional APRs on standard loans are usually 10% or less.
More business sales equate to a higher APR – With increased business sales, there is a higher APR associated with the loan. This is the case for merchant cash advances that are structured from a percentage of the credit card sales. If sales are slower and weaker, your payments are spread out over a longer period of time and the APR is lower. However, if credit card sales are high, the MCA is paid off faster but the APR also increases.
Paying the MCA off early has no benefits – In most loans, the borrower is encouraged to pay the loan off early. However, with a merchant cash advance, there are no interest savings resulting from early repayment. This is because there is a fixed amount of fees whether the loan is paid early or not. In addition, if the business owner chooses to refinance, they will still need to pay the agreed-upon fees and they may even have an early repayment penalty.
Credit score check – MCAs are provided as an option for business owners with less than stellar credit or for business owners who are still building credit. However, a provider will still pull the credit during the application process. If the credit inquiry causes a hard credit pull, this can lower your overall credit score.
What Other Options Do I Have?
When considering what type of financing is right for your small business you should look at all of the options before making a decision. While in the past many small businesses have used merchant cash advances due to a shortage of options, lenders like us are providing new avenues for small businesses to attain working capital. Our online loans provide continued access to capital, and you only pay interest on the money that you access. In addition, there is no penalty for paying a loan off before its full term. We charge low and simple interest rates between 1% and 10% depending on the type of loan you access. On the other hand, many merchant service loan providers have APRs over 35%.
Considering a Business Line of Credit
An alternative to a merchant cash advance that many business owners are turning to is a business line of credit. The business line of credit acts like a loan and a credit card in one due to the fact that there is a specific credit limit that is renewed once the balance has been paid off. This is a flexible funding source that many business owners utilize for a number of different business purchases.
Some of the most common uses for a business line of credit include:
- Purchasing materials and supplies
- Paying for the business operating costs
- Covering payroll expenses
- Paying for emergency repairs
A business line of credit is an attractive alternative to merchant cash advances because they generally have lower interest rates. In addition, they also offer a business the security of always having funding on hand to cover small emergencies and expenses. In general, a business line of credit is not typically used for large purchases such as vehicles or heavy machinery and equipment.
Online lenders make it easier than ever before to get access to the funding your business needs. With a simple online application, you can find out whether or not you are approved for your small business line of credit. The immediate nature of obtaining small business funding makes it more accessible for businesses across a wide array of different industries to obtain the funding they need.
About Business Line of Credit Hub
Business Line of Credit Hub offers direct access to lenders that can supply the right funding for your business ventures. We are committed to operating with honesty and integrity and to providing the highest quality services for business owners seeking funding. When you need a secure loan at a favorable rate, you can turn to our online service for help. Simply fill out the short form to begin your application today!
Learn More About Specific Loans for Your Business
Unsecured Small Business Loans
Secured Small Business Loans