A merchant cash advance (MCA) is an increasingly popular option for raising money when there is a need for unsecured financing in a hurry. This type of business funding is especially popular with small businesses that don’t have the collateral or good credit to secure a conventional loan. Since this financing is mainly based on the volume of credit and debit card sales, providers of merchant cash advances are not as concerned about your credit score. In addition, because a merchant cash advance is unsecured financing, no collateral is needed.
Another reason why many businesses turn to a merchant cash advance for funding rather than a conventional loan is because they haven’t been in business long enough to be able to get a loan. Most lenders require that you be in business for at least two years in order to get debt financing. In contrast, companies offering merchant cash advances usually only require that you’ve been in business for at least six months.
The other reason a merchant cash advance is often favored over a conventional loan is that you aren’t required to put up a down payment to receive your funding. With a loan, on the other hand, you are usually required to put up at least a ten percent down payment in order to get the financing.
One important distinction about a merchant cash advance is that it’s actually classified as commercial transactions and not a loan. Because of this, a merchant cash advance will not impact your future ability to get other forms of financing. In contrast, if you already have a loan, getting a second loan may be more difficult and expensive because the new loan would be subordinate to the first loan.
Although the cost of money is more expensive when you get a merchant cash advance compared to traditional loans, there are some advantages that might make it your best funding option. One of the biggest advantages is that payments to the merchant cash advance company fluctuate directly with your daily sales volume. This then tailors your repayments to the business’s daily cash flow. As a result, your payments would decrease if you had a downturn in your business. Conventional loans, on the other hand, have a fixed payment schedule.
When you get a merchant cash advance, you are selling a fixed dollar amount of future credit and debit card sales for a discounted price. In many cases, with a merchant cash advance, you can receive funding in as little as seven business days. The provider of the merchant cash advance then takes out a portion (usually around 5-10%) of your monthly credit and debit card transactions until the money and their fee is paid back.
A typical example of a merchant cash advance would be a small business receiving a lump sum of $20,000 in exchange for $25,000 of future receipts. In this example the cost of the financing is $5,000. The finance company collects a portion (generally 5-10%) from every credit card and debit card transaction until the entire $25,000 is collected. A merchant cash advance usually has terms that range from 3 to 18 months.
Merchant cash advances should usually only be used for short-term financing. Long-term use of this type of funding should be avoided due to the higher cost that you’ll pay versus a conventional loan. Although you can use the financing for anything you want, it is best if it’s used to fund things that will significantly increase cash flow. By doing this, your increased future earnings will cover the cost of the financing and generate extra profit in the long-term. Examples of prudent use of a merchant cash advance are situations where you can take advantage of a new business opportunity, obtain a supplier discount or fund a marketing campaign.
In summary, a merchant cash advance is a great way for raising money when you can’t get a conventional loan. The cost of this financing is more expensive. However, the payments are better tailored to your cash flow because they are a percentage of your credit and debit card sales. If used responsibly, a merchant cash advance can be a good source of short-term capital.
It is very important to use a reputable financing company when you go searching for a merchant cash advance. Some companies charge excessive fees for this type of financing. One excellent source of a merchant cash advance is Newtek, “the small business authority.” Newtek is one of the leading providers of small business funding in the United States. In most cases, Newtek can usually pre-qualify your business for a merchant cash advance for as much as $250,000 or as little as five thousand dollars usually within 24 hours. Oftentimes, you can get your money within seven business days.