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What is a merchant cash advance?

October 9, 2018

A business cash flow crunch is stressful. For company owners, being able to access funding is helpful for making up the gap. For many business owners, conventional loans and lines of credit may not be available because of less than perfect credit or lack of collateral.

A merchant cash advance is a non-bank alternative to get funding based on your businesses history of credit card sales transactions. This type of financial service is not a loan. Instead, it offers business owners a lump sum ‘advance’ on future credit card receipts.

How does a merchant cash advance work?

Unlike conventional banks and lending institutions, merchant cash advance providers work with businesses of all sizes. All the business owner has to prove is that the company processes credit card sales transactions. Instead of asking for collateral or putting company owners through rigorous credit checks, merchant cash advance providers evaluates the business operating history to decide if they qualify for their services.

What is needed to apply for a merchant cash advance? 

While the requirements could vary on factors like the size of the cash advance request, generally business owners should get prepared to provide the monthly sales receipts and bank account statements from the previous 2-6 months. In some cases, MCA providers may ask for additional information to help them make their decision on the status of the application. Depending on your company financials, you could qualify for 50% up to 250% of your companies average credit card sales. Merchant cash advances are available for amounts as low as a couple of thousand dollars to as much as two million if the business financials support it.

What’s the catch?

Merchant cash advances are not the same thing as a conventional business loan. Conventional loans use an APR to calculate a set monthly payment on the loan. Instead, merchant cash advance companies use ‘retrieval rate’ or a ‘holdback’ along with a ‘factor’ to determine the repayment amount. The terms of repaying a merchant cash advance can be 90 days or as long as two years.

Merchant cash advances and conventional business loans also differ in the fact that merchant cash advances require daily payments. The payment amount gets determined by credit card receipts. Generally, the holdback amount is 5% – 20% of all daily credit card sales transactions. It also includes the factor. The factor is a decimal amount which is generally between 1.1 to 1.5. This factor is the fee that gets paid to the merchant cash advance issuer. The repayment starts as soon as the advance gets funded and continues until the total is paid off in full, as per terms of the agreement.

Do the funds from a merchant cash advance for a specific purpose?

Funds raised using a merchant cash advance can get used as your company requires. Typical uses include to do repairs, to buy inventory, to pay for improvements, to prepare for the busy season, or to even out cash flow during a slower month.

Is it easy to apply for a merchant cash advance?

Merchant cash advance providers use a secure online portal to complete their MCA loan. Company owners should have access to their companies financial documentation since they’re required for consideration.

Applications for merchant cash advance have quick processing times. Borrowers can expect to get a decision on the status of their advance application within 48 hours. If all terms are agreeable, the funds get deposited into the company business account shortly after that. Once they arrive, you’re free to use them as needed

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