A merchant cash advance (MCA/) is a fast way to get money to fund your business expenses. How does it work? An MCA offers an advance against your company's future sales. Typically, an MCA is available to businesses that have a consistent volume of credit and debit card sales. Very commonly, businesses such as medical and healthcare offices, auto shops and dealerships, retail stores, and restaurants apply for an MCA when they need cash fast.
MCAs range from a few thousand dollars to over $200,000 but have a short payback period. Typically, an MCA's terms are for 18 months or less, however, there are other circumstances that can be worked out with your lender.
When it comes to calculating how much you will end up paying out to your lender, it can be difficult to understand because it's not based on an annual percentage rate (APR/) or interest rate. These advances are more costly than other types of business loans but come in handy if struggling to be approved for other loans or need money now. MCAs are based on a factor rate, a percentage expressed in decimals that show how much extra you owe on a loan. The loan's value is expressed as 1.0. Any value higher indicates the percentage on top of the loan amount the lender will be collecting. Lending factor rates additions range from 0.13 to 1.00 (1.13 to 2.00/).
Example One. If you request an MCA for $50,000 at a factor rate of 1.25 (1.0 = advance amount + 0.25 = 25% additional fee on advance amount/), you will be obligated to repay a total of $62,500, which includes $12,500 in factor fees.
Example Two. If you request an MCA for $100,000 at a factor rate of 1.50 (1.0 = advance amount + 0.50 = 50% additional fee on advance amount/), you will be obligated to repay a total of $150,000, which includes $50,000 in factor fees.
Like every decision, there are pros and cons to taking out an MCA. In some cases, the pros outweigh the cons, which include factor rates, no interest rates, your business potentially needing to change merchant processors, and possible cash flow issues.
Here are the main benefits of taking out a Merchant Cash Advance:
MCAs Mean Fast Money
When you are approved for an MCA, you see the advance FAST. In as little as a day or two, you can have money in your wallet.
MCAs Do Not Require Collateral
You do not need to bring collateral to the table since the lender is more interested in your credit and debit card sales usage. Knowing this can take a lot of pressure off taking out a loan.
MCAs have Flexible Credit Score Requirements
Credit scores are mildly considered when it comes to taking out an MCA because the lender is more interested in your sales history. If you have a history of a certain credit or debit card sales over the past 12 months, you will most likely be approved for an MCA.
Tip: Taking out an MCA and paying back promptly does not affect your credit score. Neglecting to pay back the MCA will affect your credit score.
MCAs are Easy to Qualify For
As previously stated, your lender is looking at what type of money they can make off of your business during the repayment process. If you show your business has a high volume of credit and debit card sales, then you will likely be approved!
MCAs Offer Flexible Payment Structures
Another advantage of MCAs is its flexible payments. If your repayment plan is solely based on a percentage of your business's daily sales, you do not have to pay back as much money when your sales are low. MCA's flexible repayment structure is great for businesses that fluctuate with business, whether it be seasonally or with business changes. Ask questions and work with your lender to find the right payment structure for your business.
MCAs can be Used for Whatever You Want
The beauty of an MCA - you do not have to justify your expenses. You can take out cash for whatever you want for your business, as long as you pay it back with the factor rate. If you're still determining what project you want to take on first, you do not need to have that decision made while speaking to your lender and budget out every expense.
You may be asking yourself, do I talk to a bank about this? Typically, you should aim to gather funding from a lending firm. Before applying, make sure you understand the merchant funding terms and the application prerequisites. You may find your lending firm requires your business to be up-and-running for a certain period of time along with a minimum monthly credit and debit card sales amount. Typically, if you have had an open or dismissed bankruptcy within a certain period of time, you will not qualify for the advance.
Make sure you ask your lender about all of the lending contracts you qualify for because it's always good to know your options and the best decision for your business.
Do You Want to Look at Your Financing Options?
If you find yourself needing to find funding for your business, First Union Lending is here to help.
We have nine different business loan types to choose from. This means that we're uniquely qualified to help you find the perfect loan to open your small business.
Applying for a business loan doesn't affect your credit. Better yet, your business loan may be approved as soon as the same day.
To discuss our business loans with one of our lending experts, click here or call 863-825-5626. We'll talk about our various business loans and help you get a merchant cash advance.
Get started with the process now by learning more about our business loan types here.