In business, you need instant capital for the short-term period to be more functional and competitive, and traditional bank loans take a lot of time and processes to meet the demand.
An alternative to traditional financing is a merchant cash advance (MCA), in which Funding is generally quick. There are no strict eligibility needs and no stress for any collateral.
This alternative finance solution sounds tempting, but the protocols can land you in serious legal and financial trouble if you can’t repay according to the contract.
This blog will help you know everything about MCA and help you decide whether it is a good fit for your business.
What Is a Merchant Cash Advance?
A merchant cash advance system is a business funding or contract-based finance agreement. An MCA company/lender provides funds to a business in exchange for the businesses’ daily sales earning or profit percentage.
A lender or a company will provide you with a merchant cash advance after looking at your credit card receipts and figuring out your needs and how much you can repay.
MCA does not have much paperwork, but it does not mean that the granter will provide funds without any legal activities; MCA contracts are based on the following three repayment patterns:
- Advance Amount
An agreed amount that the grantor will provide you as an advance. The advance amount can be less than, equal to, or more than your monthly sales, depending on your needs and how many days you can pay the total amount from your daily sales.
- Payback Amount
This amount is more significant in number than the advance amount. It depends on the fee charges, called the factor rate, and usually ranges from 1.2 to 1.5. This factor rate multiplies the total amount and determines the amount to be repaid.
For example, if you had an advance from a lender of $5,000 with a factor rate of 1.5%, you would owe the grantor $7,500.
Holdback percentage contracts are based on a daily collection process. A fixed percentage of the amount is automatically transferred to the lender’s account until the total amount of the advance plus additional interest is paid.
Repayment terms in MCAs generally range from three months to one year. Still, some grantors may offer more extended periods depending on the factors of the contract parameters.
Pros Of an MCA
Nothing is more evaluative to a business than the money needed to improve and upgrade operations within an estimated time. The company that needs a lump sum amount in a short period will understand the importance of merchant cash advances.
Let’s check out some of the pros of MCA to see why merchant cash advances are significant to an organization:
- Fast Funding
The most significant advantage of MCA is that you get the funds very quickly required for the urgent business operational demands. You don’t have to provide a lot of documentation and do not have to fill out many forms, which ultimately saves a lot of time.
- No Collaterals
Collateral is usually property, registries, policies, bonds, and other documents you provide to the grantor or bank in exchange for the loan.
The collateral assures the loan providers that the amount will be returned with interest within the stipulated time; otherwise, the grantor has the option to recover his loss from the collateral.
But in MCA, you do not need to provide any collateral to back up the loan, which makes MCA the right choice to opt for.
- Payment Adjusting
The loan installment mostly depends on the sales percentage in MCA, so if the sales of your business fall, then the payment will also not remain constant.
The flexible payment option makes it more beneficial for the business. You can also accommodate holdback transactions if the company is going through a slow sales phase.
- Eligibility Requirements
The traditional loans provided by the banks have credit score criteria, which sometimes makes it difficult for businesses to qualify for the loan due to low credit scores.
MCA is beneficial for a business that needs immediate working capital without meeting the eligibility requirements for a traditional loan.
Is Merchant Cash Advance Suitable for Your Business?
Have you heard the famous saying “with the good comes the bad”? You have to be cautious while applying for MCA because if the criteria are not understood clearly, it can also lead to a loss in the business profit.
You should be clear about the factoring percentage before signing the deal. It can harm you with the added cost of paying in the long run; instead, you have taken it for a short period.
You must understand all the norms before availing yourself of the cash advance. Suppose the norms are preferable and MCA is suitable to meet your business demands. In that case, MCA will be an additional opportunity for your business to take advantage of.
Decided to Go With MCA? You Must Get Professional Supervision!
It is important to have a team of professionals before incorporating Merchant Cash Advance. They will provide merchant cash advance solutions and guide what would be the right deal for the business.
MCA may seem like a quick process, but tasks like reverse consolidation, payment processing, and other mundane activities take futile time and need expertise.
It is ideal to outsource all related activities and understandings to a well-versed MCA professional team, permitting you to focus on the core functions and maximize the benefits of merchant cash advance strategy for your business.