Small businesses struggling to make ends meet because of seasonal slumps or growing pains will often turn to a merchant cash advance, MCA, to help ease the cash flow problems and get back on track. Before you apply for such an advance, you will want to know some basics about what it is, how it works, and what possible downsides are to see if it is the best option for your company.
What Is It?
An MCA is an alternative financing option to traditional business loans. It involves borrowing a lump sum from a lender and repaying it, plus a fee, with a percentage of your credit and debit card sales. This can appeal to companies needing a relatively small amount quickly.
How Does It Work?
With a merchant cash advance, you are not borrowing money from a lender as much as the lender is buying your future sales plus a fee in exchange for quick funding deposited directly to your account. The repayment for these advances is generally automatically deducted from your account based on your daily credit and debit card transactions. Because the reimbursement is a percentage and not a fixed amount, you do not have to worry about not making enough profit for a monthly payment. By comparing lenders and contracts, you can choose an advance with a fixed payment amount based on your estimated monthly revenue instead of a percentage-based amount.
What Are the Downsides?
Because these advances do not have a set timeframe for repayment and are based on your sales, you will be paying fees instead of interest on the financing. These fees are based on a factor rate of 1.1 to 1.5 percent of the advanced amount. The lender determines this rate based on their assessment of your ability to repay the advance; the lower the rate, the less risk you represent to the lender. You will also have to pay administrative, underwriting, or other fees the lender charges, which are not included in the factor rate but add to your total cost.
A merchant cash advance can be your best solution when your company needs a quick infusion of cash. These advances can be repaid through automatic deductions from your account and based on your daily or weekly credit and debit card sales. Because this is not a loan, you will not be charged interest and instead pay a fee based on your factor rate or the amount of risk the underwriters face regarding your successful repayment.