What is a Merchant Cash Advance?

No one is guaranteed to be protected from failures. Moreover, when it comes to starting a business. The establishment of a new company always implies a certain level of risk. Even if your venture is profitable and successful, everything can change drastically in a moment, and your company will experience a dip in sales. In such cases, when businesses observe a drawdown, it’s necessary to seek ways for extra funding from the outside. MCA (Merchant Cash Advance) services come as a worthy solution for such cases.

MCA services come as an excellent alternative to traditional bank loans and other financial options. In the article, we’re going to find the answer to the question “What is a merchant loan?”, explain its difference from traditional bank credits, and list the benefits of this solution.

What is a Merchant Cash Advance?

MCAs come as alternative types of business financing. The MCA implies financing a client with a lump-sum payment, the amount of which is based on the expected future revenues of a borrower. Note that this solution is typical for companies that get revenues through credit card sales. Although its purpose is similar to bank loans, the terms and requirements differ. So, let’s consider what features the MCA has if compared to bank loans:

1. Terms of request submission. MCA providers have lower requirements for submitting requests for advance issuance. Borrowers should provide just a bank statement and past credit card receipts, while banks ask for a long list of documents, including credit ratings, collateral tax records, etc. Besides, in most cases, banks set the requirement to have guarantors. Thus, not every business is accepted for financing by banks.
2. Timeframes for issuing a loan. MCA requests are processed much quicker than bank loans. While the procedure of bank loan application is considered for weeks or even months, advances are issued within a few days. This solution is excellent for businesses that need money urgently.
3. Repayment rates. Banks set fixed interests on the issued loans, while the repayment sum is calculated from the loan sum. It means that borrowers have to pay a fixed sum of money, regardless of their financial position and income. MCA brokers set a percentage to be charged from the borrowers’ revenues regularly, meaning that the latter solution is more flexible and the repayment sum depends on the borrower’s revenues.
4. Repayment terms. Advance providers offer high flexibility for repayments. Borrowers can differentiate advances, ask for rescheduling, etc.

To sum up, let us provide some statistics. According to current estimations, MCAs get the highest approval rates if compared to alternative solutions. For example, 90% of MCA requests are approved in comparison with 87% of equipment loans, 76% of business lines of credit, and just 66% of business loans.

How Does a Merchant Cash Advance Work?

To understand the explanation of the question “What is a merchant cash advance loan?”, you should realize how it works. A clear understanding of the procedure eliminates questions and doubts.

1. Picking an MCA broker. A business that requires outside funding (the borrower) investigates the market to find a suitable provider. Multiple MCA companies offer their services on the market. They provide different terms, so make sure to study several brokers and compare their offers.
2. Discussing the advance sum. The selected MCA broker studies the provided documents (statements and receipts) to evaluate what sum of advance it can issue. The borrower and the broker agree upon the sum, based on the borrower’s revenues.
3. Receiving cash. The borrowed sum is dropped in the borrower’s business bank account.
4. Fee structure. The MCA provider charges fees. Instead of a fixed interest rate implemented by banks, the broker usually charges a factor rate, a figure that multiplies the borrowed sum to get the final repayment sum. For instance, the client borrows $1000 with a factor rate of 1.5. Thus, the client should repay the total of $1500.
5. Repayment methods. Next, the repayment stage comes. Typically, borrowers repay daily or weekly. A certain percentage of daily or weekly revenues are charged and used for repayments.

The procedure is rather clear and easy to understand. There are no pitfalls or complicated paperwork. Thus, MCAs are characterized by high transparency.

Note that to simplify MCA brokers’ routine and help navigate through borrowers, special software is offered on the market. It allows for tracking repayments, monitoring compliance with repayment terms, storing valuable data about clients, classifying them in accordance with different criteria, etc. If you need such MCA software, visit the website where you’ll find advanced solutions for your businesses.

Merchant Cash Advance Rates and Fees

To realize what MCA is, you should easily navigate its fees and rates. Different terms are used in the industry, so their understanding simplifies dealing with brokers. Make sure to remember the next terms:

1. Factor rate. It’s a percentage that the MCA provider charges for using money. It usually varies between 1.1 and 1.5.
2. Origination fee. It’s a standard fee charged for issuing the advance. It’s applicable to all sorts of loans.
3. Funding or underwriting fee. This fee implies charging more for processing a financial application for advance issuance. Depending on the MCA company, it can be either a fixed sum or a percentage of the borrowed amount.
4. Administrative fee. This charge covers the cost of maintaining and processing an MCA agreement.

Pros and Cons of MCAs

Finally, let’s list the main strengths and weaknesses of MCAs. Its advantages include:

1. A high level of approval. The rate of successful applications reaches 90%, meaning that almost all borrowers, including those with bad credit histories, get satisfactory decisions for their requests.
2. Fast funding. MCA providers react to clients’ requests promptly and process them without delays. As a result, approved advances are credited within 24–48 hours. To streamline the operation, most brokers provide potential clients with the ability to apply for the advance online through a Web form.
3. No collateral is needed. Since MCA companies rely on the future revenues of their borrowers, they do not need collateral.

However, a few shortcomings are also pointed out. These are:

–       an aggressive repayment schedule with daily or weekly repayments, which makes borrowers feel hooked until the advance is paid through.

–       factor rates cost more than traditional bank loans if translated into interest rates.

–       advances are not included in a credit history.

–       advances are not subject to state loan usury laws, so, it’s impossible to set and control the maximum interest rates.

Now, you know the explanation of the issue, “What is an MCA loan?”. To draw the line, note that MCAs are an excellent solution for businesses with immediate cash needs and bad credit histories. It comes as a worthy alternative to bank loans with high interest rates and requirements for applicants. Thus, the option attracts businesses and gains popularity due to favorable terms.