By: First Union | Date:
What is a Merchant Cash Advance
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A little extra cash for your business could certainly come in handy from time to time—especially now. Small business owners are searching for sources of money to help keep their businesses afloat. But where can you get this extra money at such a critical time? This is where a merchant cash advance could prove extremely helpful. Some people don't fully comprehend what exactly a merchant cash advance entails. We want to go over some of the key elements of such a loan program versus some of the other lending products available.
The most notable difference between a more conventional business loan and a merchant cash advance is how the merchant gets the money and then proceeds to repay the debt. As most understand it, a standard commercial loan involves the lender giving the borrower money with the stipulation that the loan will be paid back over a predetermined period and as such, the borrower will repay both principal and interest. In the merchant cash advance scenario, the merchant in question receives cash as a result of selling a certain percentage of their future accounts receivable to a merchant cash advance company and/or provider.
Versus a loan, with an MCA, the repayment terms are based upon your business's future credit card sales when such sales are realized. That is to say, there isn't a set payment schedule, rather, your payments will be following the money you are bringing in at a given time.
How do you apply for a merchant cash advance?
More standard business financing products can take a lot longer to apply for and consequently get approved for. With a merchant cash advance however, the entire process is usually quite fast. Some, depending on their status and operations, can get the funds within 24 to 72 hours. The lender will likely look at your daily cash receipts. They want to ensure that you have enough coming in to be able to repay the advance promptly. They will then, upon reviewing your information and receipts, determine the holdback amount. This is essentially the percentage of your credit card sales that they will holdback until the loan is fully repaid—this is usually anywhere from ten to twenty percent of you day's sales.
And as far as this repayment portion of the advance goes, you are looking at shorter spans than you would see with other loan products. Conventional business loans often come with a 5 to 10 year repayment schedule. With a merchant cash advance, the typical repayment time is anywhere from 6 to twelve months.
So what can you use your merchant cash advance for…basically anything associated with the business. For example, you might spend the funds on: equipment purchases, expanding your company, hiring on more employees, undergoing an office remodel, or simply weathering this storm in which we all now find ourselves.