By: First Union | Date:
The Pros and Cons of a Merchant Cash Advance (MCA/)
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Is a merchant cash advance (MCA/) the right funding type for me? What are the best parts of taking out an MCA? Why shouldn't I take out a merchant cash advance?
A merchant cash advance (MCA/) is a fast way to get money to fund your business expenses by offering 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. MCAs range from a few thousand dollars to over $200,000, but have a short payback period, like 18 months or less.
Calculate Final Payout to Your MCA 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. 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/).
Like every decision, there are pros and cons to taking out an MCA.
Pros of an MCA
Believe it or not, there are a lot of positives to taking out an MCA, including the speed at which you obtain the funds, how easily you can qualify, and the flexibility you have with your funds.
You Get Your Cash Fast
When you are approved for an MCA, you see the advance extremely fast. You will have money in your wallet in as little as a day or two.
You Do Not Need to Have Any Collateral
Your lender is more interested in your credit and debit card sales usage, so you do not need to bring collateral to the table. This may open more financing opportunities for you.
You Don't Have to Have the Best Credit Score
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. Credit scores are mildly considered when it comes to taking out an MCA because the lender is more interested in your sales history.
MCAs are Easy to Qualify For
If you show your business has a high volume of credit and debit card sales, then you will likely be approved! Your lender is looking at what type of money they can make off of your business during the repayment process.
MCAs Work with You and Have Flexible Payment Schedules
MCA's flexible repayment structure is great for businesses that fluctuate with business, whether it be seasonally or with business changes. 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.
You Don't Need to Explain Your Purchases to Your Lender
You can take out cash for whatever you want for your business, as long as you pay it back with the factor rate. You do not need to have that decision made while speaking to your lender and budget out every expense if you're still determining what project you want to take on first.
Cons of an MCA
On the flip side, there are a handful of negatives regarding an MCA.
MCAs Have Factor Rates...Not Interest Rates
A factor rate is how the MCA's interest rate is determined. This has proven to be a very confusing concept because factor rates are nothing like a traditional interest rate or annual percentage rate (APR/). A factor rate is calculated by dividing the financing cost by the loan amount.
MCAs are Short-Term Solutions
MCAs are taken out for short periods of time - anywhere from three months to 15 months. Because they are short-term solutions, they are extremely expensive. MCAs can be counterproductive if you do not generate enough revenue to repay the cash advance. Because of this, an MCA may not solve your business's financial problem and you may find your business in a deeper hole.
The reality is, financing future sales is a risky business. How can anyone predict the future? Of course, this applies to any loan type you take out, but due to the short term payback period, you are putting your business in a high-risk situation.
You May Have Cash Flow Issues
Daily deductions may hurt your business's cash flow. Repayment of an MCA happens by deducting funds from credit card receipts, often on a daily basis. Make sure you fully understand your repayment plan and how it will affect you not only in the short-term but in the long-term, as well.
Payoff Speed Doesn't Matter
Taking out an MCA and paying back promptly does not affect your credit score. 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.
Whether you choose to take out an MCA or work with other funding solutions, remember that if you can guarantee sales over the short-term payback period that will leave your business profitable while paying back the MCA, consider this solution. You will have to pay back the amount of the loan, plus its factor rate, no matter what, but you will have money fast with no explanations or dings in your credit score.
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 find the right one.
Get started with the process now by learning more about our business loan types here.