When should small businesses use Merchant Cash Advance (MCA)?

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If you are a small business owner and you need to raise capital for your business quickly, then a merchant cash advance (“MCA”) might be a good route to explore. Merchant cash advance is primarily suited for those businesses whose revenues rely on debit and credit card sales.

Technically MCA is not a loan but an advance on the future revenues of your business. It is ideal for small and new businesses that don’t qualify for a business loan. After evaluating your revenue model and all the related risk factors, the MCA provider issues you a sum of cash, and it is given in exchange for your future credit sales. Basically, you are selling a portion of your future revenues to capital immediately at a cost.

It is important before applying for a merchant cash advance to understand the factor rate.

The factor rate, also known as the buy rate, is the amount of money the MCA charges to fulfill (buy) the entire advance during the time given. That is the cost of the advance.

So as an example, if you receive $10,000 merchant cash advance and the lender asks you to pay it back with a 1.3 factor rate in 12 months, that means you will pay a total of $13,000 in 12 months. Unlike interest rates, it would not matter if you paid the advance early to avoid extra interest rate charges. The entire amount paid back is set in the beginning with the factor rate.

So then when should you use merchant cash advance?

1. You are in need of capital fast for your business’s growth

If your business is starting to generate income and a quick cash infusion will help boost more growth, then analyze the projected growth rate compared to the factor rate charged by the MCA. If the new investment yields positive short or long term growth, then the advance is worth the cost. Also, because the advance is based on your business’s credit transactions, there is much less personal and business verification needed as opposed to a business loan.

2. You have negative personal or business credit report to report

Approval rates for MCA are high and allow bad credit. If you have personal or business bad credit history, such as bankruptcy or unpaid liens, then you might not qualify for any business loan. An MCA uses your recent 6-12 months credit account receivables to determine your eligibility for the advance on future sales.

Also, because the advance is based on your business’s credit transactions, there is much less personal and business verification needed as opposed to a business loan. This makes funding time faster.

3.  Most revenues are done with plastic 

If your business revenues rely heavily on debit and credit card sales, then merchant cash advance will have more favorable terms. Some MCA will also take into account a good credit history if you are not able to justify consistent credit card revenues. However, this might require your personal or business credit as collateral for the advance.

4. You don’t want your personal or business to show debt to other lenders. 

If your looking for quick cash with the idea to get a standard business or personal loan in the near future, MCAs allow that because most advances are not reported to your personal or business credit bureaus. It is important when discussing the terms with several companies to see which ones do and do not place a lien on your personal or business assets. Those that do not might charge a higher rate but it might be worth the cost in the chance of a default.

5. Confident about future credit card sales

Though merchant cash advance can help you to get an advance deposited in your account fairly quickly but, it is best that you feel confident your credit card sales will sustain or continue to grow. If sales start to go lower, you are still responsible for the full factored  return of the advance.

In the event sales do start getting lower, most MCA are relationship based lenders and speaking to them about a modification or deferment is an option. It is important to interview several MCA before taking on the advance to evaluate the type of collateral, if any, they use when approving the advance. The less collateral, the more limited they are if your business sales slow.

Again, speaking to several merchant cash advance companies is most beneficial to you as you can analyze the cost of the advance against your projected growth rate to make sure you are still positive in cash flow.

Also, compare which ones place a lien on your business and try to go for those that do not. Having them contact you directly instead of calling them will give the indication they are hungry for your business, and will be more flexible with their terms to earn it.

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