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What is a Merchant Cash Advance?
A Merchant Cash Advance (MCA) is an alternative to the lengthy approval process and the strict cash requirements that are required for the normal term loan. Technically it isn’t a loan, but rather a cash advance based upon the credit card sales of a business. A small business can apply for an MCA and have an advance deposited into its account quite quickly.
MCA providers evaluate risk and weight credit criteria differently in comparison to a banker. An MCA provider looks at the daily credit card receipts to work out if the business can pay back the funds in a timely manner. Basically, a small business “sells” some of future credit card sales to accumulate capital immediately.
Rates on MCA may be much higher than the other financing options and depending on the corporate, can be prohibitively high. It’s critical you understand the terms you’re being offered so you can make an informed decision about Return Of Investment (ROI).
How does a Merchant advance work?
In order to get the Merchant Cash Advance into working, an agreement is formed between the owner of the small business and the MCA provider regarding the payback amount, advance amount, holdback and the term of the advance. Once an agreement is formed, the advance is then transferred to the business’ bank account in exchange for a future percentage of the credit card receipts.
Each day, a percentage that is prescribed upon the daily credit card receipts are withheld to pay back the MCA. This is often called a “holdback” and it continues until the advance is paid fully. Access to a business owner’s merchant account eliminates the collateral requirement that’s required for a standard small business loan.
Repayment is based upon a percentage of the daily balance in the merchant account, so, the more credit card transactions done by a business, the faster they’re able to repay the advance. However, for the repayment and the loan costs, a business that uses a merchant cash advance has got to pay back 20% – 40% or more of the amount that’s borrowed. This percentage is named as the factor rate.
The holdback percentage is however based on:-
1. The amount of funds a business receives
2. As to how long it’ll take to pay back the amount
and it also depends upon
3. how big the monthly credit card sales are.
The typical holdback rates may range from 10%-20%, though this may vary widely based upon the business and risk.
How to Apply for Merchant Cash Advance:
The application process for Merchant Cash Advance isn’t as complicated as a standard loan. The steps a business must take are:-
Step 1: Apply for funding- the application for funding is of 1 to 2 pages and the details like social security number, business tax ID, and other important information about the business are asked
Step 2: Provide documentation:- Several months of credit card processing, as well as bank statements, are needed. Proof of citizenship, as well as a replica of the lease for the business location, is needed
Step 3: Get approved:- It only takes 24 hours for the business to be approved for MCA. Step 4: Set up the credit card processing:- this sort of funding requires the business to modify to a new credit card processor.
Step 5: Finalise the details.
Step 6: Receive the funds.
Tips and Warning:
The amount from the MCA is deposited into the small business’ bank account and the repayment via the merchant account starts automatically. However, this kind of financing doesn’t build the business credit because the merchant cash advance providers don’t report to business credit reporting agencies.