The Benefits of a Merchant Cash Advance Loan
If you feel like your small business is ready to take things to the next level, it is probably a sign of strength and stability. It can also be a little scary as you most likely will need some funding.
Applying for business loans may be the only solution, but there are different types of loans available. How will you know which loan will fit your needs the most? One type of loan to consider is a merchant cash advance loan? Not sure what that is? Let me explain some of the benefits of a MCA loan.
What is a merchant cash advance?
Before we go into discussing the benefits of merchant cash advance, let’s first talk about what it is and how it works. Merchant cash advance is many times thought to be a loan. The merchant cash advance company does give the applicant a specific amount of money, but this is where the similarity stops.
This type of “loan” is actually a financial mechanism that allows you, as the business, to “sell” your future sales. Instead of a loan, you get an advance on future sales your business is likely to achieve. Payments are then usually made in one of two ways on a daily basis. The lender either gets a portion or a percentage of your sales daily or paid back by debiting your bank account daily a specific amount. This type of “loan” is considered a short-term loan, although technically, it is similar to a loan, merchant cash advance companies do not consider it a loan, they call it “a sale of a future asset.”
Payments and how they work
Generally speaking, merchant cash advances are tied directly to credit card transactions, it is done this way as lenders feel that it is the easiest way for them to get their money back.
When using credit card transactions the amount owed is typically done by calculating all proceeds on a daily basis that the business gets and splitting it. For example, if the agreement says they get 10% then for every $100 that’s earned using credit card transactions $10 goes directly to the lender. This process continues until the entire advance is paid off.
On some rare deals, payments by the business are withdrawn based on a fixed daily amount, regardless of actual sales amount
Funding and payment calculations
The amount that the merchant cash advance company will lend you depends on several factors. The company will check your previous sales, review credit card transactions, and evaluate your bank statements. Most cash advance companies would give you an amount that is 80% to 150% of your monthly revenue. As with other loans, the amount you get will rely heavily on your ability to pay it back.
For the payment calculation, your total payable amount will range from 9% to 50% more of the money borrowed. This percentage is what cash advance companies call a “factor,” which is from 1.09 to 1.50. The factor rate is multiplied by the amount borrowed.
Because the payment period for the cash advance is short, it usually takes 3 to 15 months to pay the amount owed in full. The payback period of this loan option is shorter than most other business loans that are available.
Benefits to small business
Now that we have learned what merchant cash advance is and how it works, we’ll move forward to its advantages – how do small businesses benefit from this type of funding?
Not affecting credit scores
One good thing about merchant cash advance is that it does not appear on your credit report. It’s much safer than traditional business loans where your credit score is almost always at risk.
Fast application process
Unlike most business loans, a merchant cash advance has an easier and much more efficient application process. You’ll get financing quickly, and applications are straightforward. The cash advance company does not review your current business plans, tax returns, and financial statements. Most of the cash advance companies will only look into your monthly returns and age of your business.
Because there is not a lot of paperwork with a merchant cash advance, the turnaround time from application to funding is pretty quick. This process is the opposite of many other business loans where it can take months to get the money. With merchant cash advance, the entire process usually takes less than a week.
High application approval
If we compare merchant cash advance with small business loans, you will see an overwhelming advantage as MCA loans will have almost a 400% better approval rate. It is very rare for qualified businesses to get denied.
One of the disadvantages of traditional business loans is that when making payments they do not take into consideration your current revenue, you are obliged to pay the loan back at a fixed payment amount. Merchant cash advances are paid back daily based on your actual sales each day.
Those with bad credit can apply.
Because merchant cash advances don’t take into account your credit scores, people with bad credit can also get these loans. This fact is the total opposite from the more traditional business loans. If you have bad credit with traditional loans, you will most times get denied. MCA providers/lenders focus more on your actual sales than your credit.
Merchant cash advance loans have proven to be a big help to small businesses, especially with start-ups, seasonal entities, as well as those seeking emergency funds. The reduced hassle and rapid funding make these type of loans ideal for many businesses needing quick results.