Merchant Cash Advance is a type of funding, and it is not a loan according to the last month decision by President & CEO in 800fund.com, Alternative Lending Solutions. Lending companies agree to advance money to merchants by purchasing their future receivables. The first ever comprehensive industry report on merchants cash advance and small business lending appeared last year. The specialists took one more survey at the beginning of the year, thus and so comparison of results showed increased confidence index among industry executives from 84,4 % in Q4 2015 to 91,7 % in Q1 2016. The rapid growth of MCA marketplace has helped to improve the economy of the U.S.A.
What is Merchant Cash Advance
A merchant cash advance (MCA) is not technically a loan, but rather a purchase and sale agreement, where, the lender buys the right to take money from your business card transactions and sells those rights back to you for a fee. With a merchant cash advance, a fund provides gives an unsecured working capital to business owners in exchange for a percentage of future receivables.
A merchant cash advance can be used for almost any business expense, including:
- Purchase new inventory or equipment
- Bridge the gap in cash flow
- Pay debt or a tax bill
- Open new location (store, office, etc.)
- Unexpected expenses
- Financing for Marketing
Remember that lenders may want to know how you plan to use the borrowed money. Some lenders are flexible on the use, and some allow you to use the funds to grow your business, these companies will require proof of your financial solvency. Thus and so before applying, make sure you have a business plan on tap.
How Merchant Cash Advance Works
A merchant cash advance is not a loan; instead, it is an advance payment against your company’s future income. Any business that has a credit card or open line of credit may easily qualify for a merchant cash advance, and most MCA providers approve 9 out of 10 applications. MCA providers measure their fees with a factor rate instead of an interest rate, and it is often referred to as a factor rate that is assigned by the provider and the borrower right from the very beginning. The MCA provider automatically deducts a percentage of your credit card sales in return for the lump sum until it is repaid in full.
To determine the total amount to be repaid, the customer should multiply his advance amount by a factor rate. 800fund.com is merchant cash advance provider and offers the factor from 1.23 to 1.56. For example, a borrower applied for $100,000 advance with a factor rate of 1.3. Thus a total repayment of this advance will be $130,000. Since the borrower is to repay a fixed amount of fees no matter what, he gets no interest savings from early repayment. This differs from a traditional small business loan, in which early repayment would result in less interest paid.
Because repayment is based upon a percentage of the daily sales in the merchant account, the more credit card transactions a business does, the faster can repay the advance. And, when your company has lower transactions, the draw from the account will also be less. This means that during times of slow business, the business’ payback is about their incoming cash flow.
The amount you can borrow is determined by your average credit card sales, but generally, the advanced amount varies from $1,000 to $1,000,000. MCA providers review your receipts over the past six months to determine how much money you can borrow.
Merchant Cash Advance Benefits
A merchant cash advance can be costly, but anyway, it has several benefits that make it a preferred source of funding. When considering an advance, these are the most important benefits to keep in mind.
Simple Application Process
Applying for a merchant cash advance is something business owners can do from the comfort of the office/home/or even bed without going somewhere. It takes minutes, as you can fill out online application form that has just several easy questions:
- Money amount
- Your Name
- Your Email
- Phone Number
- Business Name
- Business Type
Funding is Fast
One of the main benefits of a merchant cash advance is fast approval and funding. Obtaining financing from the bank can take weeks or even months, but a decision from MCA lender whether to provide your company with working capital or not is rendered within hours, and after that funds are delivered business owner account within a matter of a day. Thus the whole process can take max 48-72 hours! That is certainly and without any doubt a plus if you need working capital asap to bridge the gap in cash flow.
Perfect Credit is NOT required
A good credit reputation is a requirement for most business loans, but merchant cash advance lenders are more indulgent. Approval depends more on your years in business and your credit card sales rather than on your past payment history. Keep in mind, however, that a merchant cash advance will not help you to build good credit score since most providers do not report them to the credit bureaus.
Taking out financing from a bank, a loan officer will ask you about collateral you may secure with your lending. That is a common thing as banks are scary to supply risky industries and ventures. The collateral is the bank’s insurance policy in case you fail to repay your debt to the full, whereas, in contrast, merchant cash advances are unsecured, so you do not have to put any personal or business assets to secure money borrowing.
Small business loans have a fixed interest rate together with a fixed payment, meaning you have to pay the bank the same amount every month. It can be problematic if you are running a seasonal business that sometimes has slow months, what means cannot afford the regular payments. A merchant cash advance is more flexible since payments are based on the percentage of your credit card sales.
The approval rates are high
As it was mentioned 9 out of 10 applications are approved while banks approve only 2 out of 10 borrowings.
Alternatives to Merchant Cash Advance
If you do not have a credit card or do not want to pay a percent of your sales, there are some other possibilities you can seek for.
Small business loan. You can obtain it from any bank or lender you like, but keep in mind you borrow an amount that is then repaid over a fixed amount monthly. The APR on a term loan would be more favorable than a merchant cash advance. Your repayment term may last from 12 months to 10 years and the more you borrow, the more likely you are to need collateral. Before applying for a small business loan, be sure to read our all requirements to prepare.
How to Apply
The time it takes to get approved for a merchant cash advance could be less than few days. And once the borrower is approved, a business takes the funds into account within a day. The application process is not as complicated as a business loan from a local bank. Just fill out an application form on the merchant cash advance lender’s website and your pre-approval will be emailed to you instantly. Thus and so the whole process consists of following steps:
- Apply for funding
- Provide all required information and documentation
- Get approved.
- Make sure you have processed credit cards for a minimum of six months
- Receive the funds
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